DESIGN WITHIN REACH INC - Recent Material Event

Item may be found in the Proxy Statement for our 2009 Annual Meeting of Stockholders, which will be filed within 120 days following the end of our fiscal year ended January 3, 2009. Such information is incorporated herein by reference. Certain documents relating to the registrant’s corporate governance, including the Code of Business and Ethics, which is applicable to the registrant’s directors, officers and employees and the charters of the Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee of the registrant’s Board of Directors, are available on the registrant’s website at http://www.dwr.com.

Item 11. Executive Compensation

The information required by this Item may be found in the Proxy Statement for our 2009 Annual Meeting of Stockholders, which will be filed within 120 days following the end of our fiscal year ended January 3, 2009. Such information is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item may be found in the Proxy Statement for our 2009 Annual Meeting of Stockholders, which will be filed within 120 days following the end of our fiscal year ended January 3, 2009. Such information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item may be found in the Proxy Statement for our 2009 Annual Meeting of Stockholders, which will be filed within 120 days following the end of our fiscal year ended January 3, 2009. Such information is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information required by this Item may be found in the Proxy Statement for our 2009 Annual Meeting of Stockholders, which will be filed within 120 days following the end of our fiscal year ended January 3, 2009. Such information is incorporated herein by reference.

 

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PART IV

Item 15. Exhibits and Financial Statement Schedules

Financial Statements

The following financial statements are included in this report:

 

     Page

Report of Independent Registered Public Accounting Firm

   62

Balance Sheets as of January 3, 2009 and December 29, 2007

   63

Statements of Operations for the Fiscal Years Ended January 3, 2009, December 29, 2007 and December  30, 2006

   64

Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the Fiscal Years Ended January  3, 2009, December 29, 2007 and December 30, 2006

   65

Statements of Cash Flows for the years ended January 3, 2009, December 29, 2007 and December  30, 2006

   66

Notes to Financial Statements

   67

All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

Supplementary Data

Unaudited Quarterly Financial Data

Exhibits

Exhibits. The following exhibits are filed as a part of this report or are incorporated by reference to exhibits previously filed.

 

Exhibit

Number

 

Exhibit Title

  3.01(1)   Amended and Restated Certificate of Incorporation
  3.02(2)   Amended and Restated Bylaws
  3.03(3)   Certificate of Designations for Series A Junior Participating Preferred Stock of Design Within Reach, Inc.
  4.01(3)   Form of Common Stock Certificate
  4.02(3)   Rights Agreement, dated as of May 23, 2006, among Design Within Reach, Inc. and American Stock Transfer and Trust Company, N.A., as Rights Agent, including the form of Certificate of Designations of the Series A Junior Participating Preferred Stock of Design Within Reach, Inc. as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C
  4.03(4)   First Amendment dated December 13, 2007 to Rights Agreement dated May 23, 2006 between Design Within Reach, Inc. and American Stock Transfer and Trust Company
  4.04(5)   Second Amendment dated February 12, 2009 to Rights Agreement dated May 23, 2006 between Design Within Reach, Inc. and American Stock Transfer and Trust Company
10.01(1)   Form of Indemnification Agreement entered into by Design Within Reach, Inc. and its directors and executive officers
10.02(6)   Credit Agreement, dated as of December 23, 2005, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.
10.03(1)   Sublease Agreement, dated October 23, 2003, by and between National Broadcasting Company, Inc. and Design Within Reach, Inc.
10.04(1)   Lease Agreement, dated October 2, 2003, by and between Dugan Financing LLC and Design Within Reach, Inc.

 

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Exhibit

Number

 

Exhibit Title

10.05(1)   Design Within Reach, Inc. 1999 Stock Plan, amended as of October 29, 2003
10.06(7)   Design Within Reach, Inc. 2004 Equity Incentive Award Plan
10.07(1)   Design Within Reach, Inc. Employee Stock Purchase Plan
10.08(1)   Private Label Credit Card Program Agreement, dated as of November 13, 2003, between World Financial Network National Bank and Design Within Reach, Inc.
10.09(8)   Third Amendment to Credit Agreement, dated as of June 3, 2004, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.
10.10(9)   Form of Option Agreement under Design Within Reach, Inc. 2004 Equity Incentive Award Plan
10.11(10)   Loan Guaranty and Security Agreement among Design Within Reach, Inc., the Lenders thereto and Wells Fargo Retail, Finance, LLC, as Administrative Agent, dated as of February 2, 2007
10.12(11)   Employment Agreement dated March 31, 2008 between Design Within Reach, Inc. and Ray Brunner
10.13(12)   First Amendment to Loan Guaranty and Security Agreement among Design Within Reach, Inc., the Lenders thereto and Wells Fargo Retail, Finance, LLC, as Administrative Agent, dated as of March 18, 2009
10.14   Offer Letter dated November 13, 2008 between Design Within Reach, Inc. and Theodore R. Upland III
23.1   Consent of Independent Registered Public Accounting Firm
31.1   Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934
31.2   Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934
32*     Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(1) Incorporated by reference to the Registration Statement on Form S-1 (No. 333-113903) filed on March 24, 2004, as amended.
(2) Incorporated by reference to Amendment No. 2 to Registration Statement on Form S-1 (No. 333-113903) filed on June 1, 2004, as amended.
(3) Incorporated by reference to Design Within Reach’s Current Report on Form 8-K filed on May 25, 2006.
(4) Incorporated by reference to Design Within Reach’s Current Report on Form 8-K filed on December 14, 2007.
(5) Incorporated by reference to Design Within Reach’s Current Report on Form 8-K filed on February 13, 2009.
(6) Incorporated by reference to Design Within Reach’s Current Report on Form 8-K filed on April 17, 2006.
(7) Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1 (No. 333-113903) filed on May 17, 2004, as amended.
(8) Incorporated by reference to Amendment No. 3 to Registration Statement on Form S-1 (No. 333-113903) filed on June 10, 2004, as amended.
(9) Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2005 filed on February 17, 2005.
(10) Incorporated by reference to Design Within Reach’s Current Report on Form 8-K filed on February 8, 2007.
(11) Incorporated by reference to Design Within Reach’s Current Report on Form 8-K filed on April 2, 2008.
(12) Incorporated by reference to Design Within Reach’s Current Report on Form 8-K filed on March 23, 2009.
* These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Design Within Reach, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Design Within Reach, Inc.

We have audited the accompanying balance sheets of Design Within Reach, Inc. (a “Delaware corporation”) as of January 3, 2009 and December 29, 2007, and the related statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended January 3, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial statements referred to above present fairly, in all material respects, the financial position of Design Within Reach, Inc. as of January 3, 2009 and December 29, 2007, and the results of its operations and its cash flows for each of the three years in the period ended January 3, 2009 in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

San Francisco, California

March 31, 2009

 

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Design Within Reach, Inc.

Balance Sheets

(amounts in thousands, except per share data)

 

     January 3,
2009
    December 29,
2007
 

ASSETS

    

Current assets

    

Cash and cash equivalents

   $         8,684     $         5,651  

Inventory

     36,596       37,820  

Accounts receivable (less allowance for doubtful accounts of $164 and $264, respectively)

     1,762       1,176  

Prepaid catalog costs

     708       2,101  

Deferred income taxes

           1,251  

Other current assets

     3,675       1,986  
                

Total current assets

     51,425       49,985  

Property and equipment, net

     23,702       23,302  

Deferred income taxes, net

           8,182  

Other non-current assets

     1,025       955  
                

Total assets

   $ 76,152     $ 82,424  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Accounts payable

   $ 16,978     $ 14,442  

Accrued expenses

     4,455       4,500  

Accrued compensation

     1,945       2,765  

Deferred revenue

     1,162       325  

Customer deposits and other liabilities

     3,191       3,397  

Borrowings under loan agreement

     13,949        

Long-term debt and capital leases, current portion

     254       346  
                

Total current liabilities

     41,934       25,775  

Deferred rent and lease incentives

     6,373       5,976  

Long-term debt, net of current portion

     223       321  
                

Total liabilities

     48,530       32,072  
                

Commitments and Contingencies (Note 7)

    

Stockholders’ equity

    

Preferred stock – $0.001 par value; 10,000 shares authorized; no shares issued and outstanding

            

Common stock – $0.001 par value; authorized 30,000 shares; issued and outstanding, 14,480 and 14,455 shares

     14       14  

Additional paid-in capital

     60,585       59,146  

Accumulated other comprehensive income

     (111 )     73  

Accumulated deficit

     (32,866 )     (8,881 )
                

Total stockholders’ equity

     27,622       50,352  
                

Total liabilities and stockholders’ equity

   $ 76,152     $ 82,424  
                

The accompanying notes are an integral part of these financial statements.

 

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Design Within Reach, Inc.

Statements of Operations

(amounts in thousands, except per share data)

 

     Fiscal Years  
     2008     2007     2006  

Net sales

   $     178,903     $     193,936     $     178,142  

Cost of sales

     100,798       107,014       103,681  
                        

Gross margin

     78,105       86,922       74,461  

Selling, general and administrative expenses

     92,435       87,651       87,555  
                        

Loss from operations

     (14,330 )     (729 )     (13,094 )

Interest income

     182       385       307  

Interest expense

     (321 )     (625 )     (252 )

Other income (expense), net

     (99 )     2,018       157  
                        

Income (loss) before income taxes

     (14,568 )     1,049       (12,882 )

Income tax expense (benefit)

     9,417       726       (4,593 )
                        

Net income (loss)

   $ (23,985 )   $ 323     $ (8,289 )
                        

Net income (loss) per share:

      

Basic

   $ (1.66 )   $ 0.02     $ (0.58 )

Diluted

   $ (1.66 )   $ 0.02     $ (0.58 )

Weighted average shares used in calculation of net income (loss) per share:

      

Basic

     14,465       14,430       14,342  

Diluted

     14,465       14,544       14,342  

The accompanying notes are an integral part of these financial statements.

 

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Design Within Reach, Inc.

Statements of Stockholders' Equity and Comprehensive Income (Loss)

(amounts in thousands)

 

            Additional
Paid-in
Capital
    Deferred
Stock-based
Compensation
    Accumulated
Other
Comprehensive
Income (Loss)
    Accumulated
Earnings
(Deficit)
    Total
Stockholders’
Equity
 
                   
    Common Stock          
    Shares   Amount          

Balance—December 31, 2005

  14,042   $     14   $     55,756     $             (628 )   $             (789 )   $             (811 )   $     53,542  

Stock based compensation

          1,926                         1,926  

Issuance of common stock from exercise of stock options

  363         341                         341  

Issuance of common stock from stock purchase plan

  8         44                         44  

Accounting change from stock based compensation

          (628 )     628                    

Tax benefit from employee equity incentive plans

          (590 )                       (590 )

Comprehensive (loss):

             

Net (loss)

                            (8,289 )     (8,289 )

Net gain on foreign currency cash flow hedges

                      789             789  
                   

Comprehensive (loss)

                (7,500 )
                                                 

Balance—December 30, 2006

  14,413     14     56,849                   (9,100 )     47,763  

Cumulative effect of adoption of FIN 48

                        (104 )     (104 )

Stock based compensation

          2,272                         2,272  

Issuance of common stock from exercise of stock options

  42         40                         40  

Tax impact from cancelation of non-qualified stock options

          (15 )                       (15 )

Comprehensive income:

             

Net income

                            323       323  

Net gain on foreign currency cash flow hedges

                      73             73  
                   

Comprehensive income

                396  
                                                 

Balance—December 29, 2007

  14,455     14     59,146             73       (8,881 )     50,352  

Stock based compensation

          1,458                         1,458  

Issuance of common stock from exercise of stock options

  9         9                         9  

Issuance of common stock from stock purchase plan

  16         31                         31  

Tax impact from cancelation of non-qualified stock options

          (59 )                       (59 )

Comprehensive (loss):

             

Net (loss)

                            (23,985 )     (23,985 )

Net (loss) on foreign currency cash flow hedges

                      (184 )           (184 )
                   

Comprehensive (loss)

                (24,169 )
                                                 

Balance—January 3, 2009

  14,480   $ 14   $ 60,585     $     $ (111 )   $ (32,866 )   $ 27,622  
                                                 

The accompanying notes are an integral part of these financial statements.

 

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Design Within Reach, Inc.

Statements of Cash Flows

(amounts in thousands)

 

     Fiscal Years  
     2008     2007     2006  

Cash flows from operating activities:

      

Net income (loss)

   $     (23,985 )   $     323     $     (8,289 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

      

Depreciation and amortization

     6,252       7,090       8,919  

Stock-based compensation

     1,458       2,272       1,926  

Impairment of long-lived assets

     268              

Loss on the sale/disposal of long-lived assets

           48       180  

Provision for doubtful accounts

     56       (120 )     131  

Amortization of bond premium

                 2  

Deferred income taxes

     9,433       728       (2,453 )

Tax impact from cancelation of non-qualified stock options

     (59 )     (15 )      

Changes in assets and liabilities:

      

Inventory

     1,224       (3,971 )     (2,610 )

Accounts receivable

     (642 )     1,458       (1,077 )

Prepaid catalog costs

     1,393       (1,055 )     191  

Other assets

     (1,869 )     420       1,516  

Accounts payable

     2,593       (2,742 )     (376 )

Accrued expenses

     175       113       (202 )

Accrued compensation

     (820 )     320       906  

Deferred revenue

     837       (1,258 )     (107 )

Customer deposits and other liabilities

     (317 )     1,055       742  

Deferred rent and lease incentives

     397       396       1,110  
                        

Net cash provided by (used in) operating activities

     (3,606 )     5,062       509  
                        

Cash flows from investing activities:

      

Purchase of property and equipment

     (6,974 )     (5,688 )     (8,128 )

Proceeds from sales of property and equipment

           3       19  

Purchases of investments

                 (15,275 )

Sales of investments

                 24,925  
                        

Net cash provided by (used in) investing activities

     (6,974 )     (5,685 )     1,541  
                        

Cash flows from financing activities:

      

Proceeds from issuance of common stock, net of expenses

     40       40       385  

Net borrowings under loan agreement

     13,949             1,068  

Repayments of long-term obligations

     (376 )     (561 )     (136 )
                        

Net cash provided by (used in) financing activities

     13,613       (521 )     1,317  
                        

Net increase (decrease) in cash and cash equivalents

     3,033       (1,144 )     3,367  

Cash and cash equivalents at beginning of period

     5,651       6,795       3,428  
                        

Cash and cash equivalents at end of the period

   $ 8,684     $ 5,651     $ 6,795  
                        

Supplemental disclosure of cash flow information

      

Cash paid during the period for:

      

Income taxes paid (refunded)

   $ 297     $ 76     $ (1,985 )

Interest paid

   $ 357     $ 657     $ 250  

Non-cash investing and financing activities:

      

Capital lease obligations incurred

   $ 186     $ 123     $  

Gain (loss) on fair value of derivatives

   $ (51 )   $ 51     $ (262 )

The accompanying notes are an integral part of these financial statements.

 

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Design Within Reach, Inc.

Notes to Financial Statements

 

1. Description of Company and Summary of Significant Accounting Policies

Organization and Business Activity

Design Within Reach, Inc. (the “Company”) was incorporated in California in November 1998 and reincorporated in Delaware in March 2004. The Company is an integrated retailer of distinctive modern design products. The Company markets and sells its products to both residential and commercial customers through three integrated sales points consisting of studios, website and phone. The Company sells its products directly to customers principally throughout the United States. The Company opened its first international studio in Canada in the first quarter 2008.

The Company operates on a 52- or 53-week fiscal year, which ends on the Saturday closest to December 31. Each fiscal year consists of four 13-week quarters, with an extra week added onto the fourth quarter every four to six years. The Company’s 2008, 2007 and 2006 fiscal years ended on January 3, 2009, December 29, 2007 and December 30, 2006, respectively. Fiscal year 2008 consisted of 53 weeks, and each of fiscal years 2007 and 2006 consisted of 52 weeks.

Basis of Presentation

These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial losses from operations in recent years and has used cash in operations during 2008. During the latter part of 2008, the economic downturn impacted the Company’s operations, resulting in lower sales and higher losses than expected.

In view of the matters described in the preceding paragraph, the going concern of the Company is dependent upon generating sales at forecasted levels. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

In response to lower sales following the economic downturn and subsequent loss from operations in 2008, the Company in January 2009 undertook several initiatives to lower its expenses to better match the forecasted reduction in revenues and improve liquidity. Management has taken the following steps, which it believes are sufficient to provide the Company with the ability to continue in existence. The Company restructured certain real estate lease contracts, reduced marketing and catalog expenses mainly with fewer planned catalog mailings and fewer pages, delayed implementation of a new ERP system, renegotiated certain support contracts and lowered outside contractor fees as well as headcount in all areas of the company. The total annualized reduction in expenses is expected to be approximately $18 million (unaudited) compared to 2008 levels. The Company also plans to reduce inventory levels significantly from year-end 2008 levels to generate additional liquidity. Although not anticipated, the Company will, as needed, further reduce its anticipated level of expenditures to enable the Company to meet its projected operating and capital requirements through December 2009.

Segment Reporting

The Company’s business is conducted in a single operating segment. The Company’s chief operating decision maker is the Chief Executive Officer who reviews a single set of financial data that encompasses the Company’s entire operations for purposes of making operating decisions and assessing performance.

 

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Design Within Reach, Inc.

Notes to Financial Statements - (continued)

 

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management of the Company to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. Actual results could differ from those estimates and such differences could affect the results of operations reported in future periods.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents primarily consists of cash and money market funds stated at cost, which approximates fair value (Note 2).

Accounts Receivable

Accounts receivable consists of amounts due from major credit card companies that are generally collected within one to five days after the customer’s credit card is charged and receivables due from commercial customers due within 30 days of the invoice date. Amounts due from customers net of allowance for doubtful accounts were $1,457,000 and $543,000 as of January 3, 2009 and December 29, 2007, respectively. Accounts receivable also includes other receivables primarily due from vendors. The Company estimates its allowance for doubtful accounts by considering a number of factors, including the length of time accounts receivable are past due and the Company’s previous loss history. The following table presents activities in the allowance for doubtful accounts:

 

Fiscal Years

(amounts in thousands)

   Beginning
Balance
   Charged/
(Credited) to

Operations
    Reserve
Reduction due

to Write-offs
    Ending Balance
         

2008

   $           264    $                 56     $                 (156 )   $                     164

2007

     384      (120 )           264

2006

     253      131             384

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and accounts receivable. Cash and cash equivalents are deposited with financial institutions. The Company’s cash balances at financial institutions of $8,684,000 as of January 3, 2009 are not insured except for approximately $250,000 that is insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. Cash includes amounts held in Canadian currency of US$514,000 as of January 3, 2009 that is subject to the risk of exchange rate fluctuations.

Inventory

Inventory consists of finished goods purchased from third-party manufacturers and estimated inbound freight costs. Inventory on hand is carried at the lower of cost or market. Cost is determined using the average cost method. The Company writes down inventory below cost to the estimated market value when necessary, based upon assumptions about future demand and market conditions.

 

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Design Within Reach, Inc.

Notes to Financial Statements - (continued)

 

Total inventory includes inventory-in-transit that consists primarily of finished goods purchased from third-party manufacturers that are in-transit from the vendor to the Company when terms are FOB shipping point and estimated inbound freight costs. Inventory-in-transit also includes those goods that are in-transit from the Company to its customers. Inventory-in-transit is carried at cost.

Vendor Concentration

During 2008, 2007 and 2006, product inventories supplied by one vendor constituted approximately 16.5%, 13.4% and 16.8% of total purchases, respectively, while product inventories supplied by the Company’s top five vendors constituted approximately 43.1%, 35.6% and 33.8% of total purchases, respectively. In 2008, the Company purchased approximately 25% of its product inventories in Euro-denominated transactions that were subject to the risk of exchange rate fluctuations.

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over the assets’ estimated useful lives. Construction-in-progress, consisting primarily of computer software and leasehold improvements, is not depreciated until it is placed in service. Construction-in-progress as of January 3, 2009 consisted primarily of computer software related to new information technology systems of approximately $2,540,000. In January 2009 the Company deferred the implementation of new information technology systems because of the recession, but believes that the implementation is probable within a reasonable timeframe. The Company currently plans to resume implementation when sales increase and cash flow becomes available. Should the Company ultimately not resume implementation within a reasonable timeframe, these assets may be subject to impairment. Costs of maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. Estimated useful lives are as follows:

 

Computer equipment and software

   18 months - 5 years

Furniture and equipment

   5 years

Capitalized equipment leases

   Life of lease

Leasehold improvements

   10 years or remaining life of lease, whichever is shorter

The Company receives construction allowances from landlords for tenant improvements under many of its lease agreements. Each construction allowance is deferred and amortized on a straight-line basis over the life of the lease as a reduction of rent expense.

Deferred Rent and Lease Incentives

The Company’s operating leases typically contain free rent periods, reimbursements for the cost of leasehold improvement construction and predetermined fixed increases of minimum rental rates during the lease term. For these leases, the Company recognizes rental expense on a straight-line basis over the minimum lease term and records the difference between the amounts charged to expense and the rent paid as deferred rent and lease incentives.

 

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Revenue Recognition

Significant management judgments and estimates must be made and used in connection with determining net sales recognized in any accounting period. The Company recognizes revenue on the date on which it estimates that the product has been received by the customer and retains title to items and bears the risk of loss of shipments until delivery to its customers. The Company recognizes shipping and handling fees charged to customers in net sales at the time products are estimated to have been received by customers. The Company recognizes revenue gross in accordance with Emerging Issues Task Force (“EITF”) 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent because it bears the risk of loss until delivery to customers. The Company uses third-party freight carrier information to estimate standard delivery times to various locations throughout the United States and Canada. The Company records as deferred revenue the dollar amount of all shipments for a particular day, if based upon the Company’s estimated delivery time, such shipments, on average, are expected to be delivered after the end of the reporting period. As of January 3, 2009 and December 29, 2007, deferred revenue was $1,162,000 and $325,000, respectively, and related deferred cost of sales was $572,000 and $173,000, respectively.

Sales are recorded net of expected product returns by customers. The Company analyzes historical returns, current economic trends, changes in customer demand and acceptance of products when evaluating the adequacy of the sales returns and other allowances in any accounting period. The returns allowance is recorded as a reduction to net sales for the estimated retail value of the projected product returns and as a reduction in cost of sales for the corresponding cost amount, less any reserve for estimated scrap. The following table presents activities in the reserve for estimated product returns:

 

Fiscal Years

(amounts in thousands)

   Beginning
Balance
   Increase/
(Decrease)
    Ending
Balance

2008

   $             654    $             (81 )   $             573

2007

     565      89       654

2006

     323      242       565

Various governmental authorities directly impose taxes on sales including sales, use, value added and some excise taxes. The Company excludes such taxes from net sales. The Company accounts for gift cards by recognizing a liability at the time a gift card is sold, and recognizing revenue at the time the gift card is redeemed for merchandise. Promotion gift cards, issued as part of a sales transaction, are recorded as a reduction in sales for the value of the gift card.

Shipping and Handling Costs

Shipping costs, which include inbound and outbound freight costs, are included in cost of sales. The Company records costs of shipping products to customers in cost of sales at the time products are estimated to have been received by customers. Handling costs, which include fulfillment center expenses, call center expenses, and credit card fees, are included in selling, general and administrative expenses. Handling costs were approximately $9,006,000, $9,200,000 and $9,813,000 in 2008, 2007, and 2006, respectively.

Studio Pre-Opening Costs

Studio pre-opening costs are expensed as they are incurred.

 

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Stock-Based Compensation

The Company accounts for stock-based compensation under Statement of Financial Accounting Standards (“FAS”) No. 123R, Share-Based Payment (“FAS 123R”). Stock-based compensation expense was $1,458,000, $2,272,000 and $1,926,000 in 2008, 2007 and 2006, respectively. No income tax benefit was recognized in 2008 for stock-based compensation arrangements because of the valuation allowance. Total income tax benefit recognized in the statements of operations for stock-based compensation arrangements was approximately $508,000 and $400,000 in 2007 and 2006, respectively. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of FAS 123R and related EITF 96-18.

The fair value of option grants has been determined using the Black-Scholes option pricing model with the following assumptions:

 

     Fiscal Years
     2008    2007    2006

Risk-free interest rate

   1.7% - 3.3%    3.7% - 4.9%    4.3% -5.0%

Expected volatility of common stock

   58% - 65%    52% - 55%    57% - 61%

Dividend yield

        

Expected life (years)

   6.1    5.3 - 6.1    5.1 - 6.1

Forfeiture rate

   16%    22%    22%

In 2008, the Company used its historical volatility rate since going public in July 2004, as management believes this is a sufficient period to calculate historical volatility. In 2006 and 2007, the Company used a blended volatility rate using a combination of historical stock prices of the Company and volatility data from four publicly traded retail industry peers due to the relatively short period since the Company’s initial public offering. The risk-free interest rate assumption is based upon the closing rates on the grant date for U.S. treasury notes that have a life that approximates the expected life of the option. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The expected life of employee stock options is based on the simplified method of estimating expected life in accordance with Staff Accounting Bulletin 110 (“SAB 110”). Under the guidance of SAB 110, companies with “plain vanilla” options may use the simplified method to calculate the expected term when a company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded. The Company estimates a forfeiture rate at the time of option grant as required by FAS 123R and revises estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Advertising and Media Costs

The cost of print media advertising, other than direct response catalogs, is expensed upon publication. Direct response catalog costs are recorded as prepaid catalog costs and consist of third-party costs, including paper, printing, postage, name acquisition and mailing costs. In accordance with Statements of Position of the Accounting Standards Division No. 93-7, Reporting on Advertising Costs (“SOP 93-7”), advertising costs must be expensed as incurred unless the advertising elicits sales to customers. In order to conclude that advertising elicits sales to customers who could be shown to have responded specifically to the advertising, there must be a means of documenting that response, including a record that can identify the name of the customer and the advertising that elicited the direct response.

 

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Notes to Financial Statements - (continued)

 

In the first nine months of 2008 and all of 2007, prepaid catalog costs were amortized over their expected period of future benefit of approximately four months in accordance with SOP 93-7, based upon weighted-average historical revenues attributed to previously issued catalogs. In the fourth quarter 2008, prepaid catalog costs were expensed upon publication since the Company no longer adequately tracked the required information required by SOP 93-7, resulting in approximately $1,140,000 of increased catalog expense in 2008 and $1,140,000 reduction of prepaid catalog costs at January 3, 2009.

Prepaid catalog costs of $708,000 as of January 3, 2009 were for the costs of catalogs to be distributed in 2009. Prepaid catalog costs of $2,101,000 as of December 29, 2007 included direct response catalog costs distributed in 2007 and amortized in 2008 of $1,040,000, and the costs of catalogs to be distributed in 2008 of $1,061,000. Prepaid catalog costs are evaluated for realizability at the end of each reporting period. If the carrying amount associated with each catalog is in excess of the estimated probable remaining future net benefit associated with that catalog, the excess is expensed in the current reporting period.

The Company donated merchandise to third parties for advertising purposes. These donations were $56,000, $30,000 and $92,000 in 2008, 2007 and 2006, respectively. The Company accounts for consideration received from its vendors for co-operative advertising as a reduction of selling, general and administrative expense. Co-operative advertising amounts earned by the Company were $835,000, $666,000 and $514,000 in 2008, 2007 and 2006, respectively. Advertising and promotion expenses, including catalog expense, net of co-operative advertising, were $13,972,000, $9,892,000 and $10,623,000 in 2008, 2007 and 2006, respectively.

Apart from amounts received from vendors for cooperative advertising, the Company does not typically receive allowances or credits from vendors. In the case of a few select vendors, the Company receives a small discount of approximately 2% for prompt payment of invoices. These discounts were recorded as a reduction of costs of sales and totaled $230,000, $184,000 and $128,000 in 2008, 2007 and 2006, respectively.

Impairment of Long-Lived Assets

The Company evaluates the recoverability of its long-lived assets in accordance with FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”). Long-lived assets are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. Management considers the following circumstances and events to assess the recoverability of carrying amounts: 1) a significant adverse change in the extent or manner in which long-lived assets are being used or in their physical condition, 2) an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset, 3) a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset, and 4) a current expectation that, more likely than not, the long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. If the undiscounted future cash flows from the long-lived assets are less than the carrying value, a loss is recognized equal to the difference between the carrying value and the fair value of the assets.

Decisions to close a studio or facility also can result in accelerated depreciation over the revised useful life. When the Company closes a location that is under a long-term lease, the Company records a charge for the fair value of the liability associated with that lease at the cease-use date. The fair value of such liability is calculated based on the remaining lease rental payments due under the lease, reduced by estimated rental payments that could be reasonably obtained by the Company for subleasing the property to a third party. The estimate of future cash flows is based on the Company’s experience, knowledge and typically third-party advice or market data. However, these estimates can be affected by factors such as future studio profitability, real estate demand and economic conditions that can be difficult to predict.

 

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Notes to Financial Statements - (continued)

 

On October 10, 2008, the Company closed its Las Vegas studio. The related leasehold improvements with a net cost of $94,000 were deemed impaired. An impairment charge of $94,000 was recorded in selling, general and administrative expenses.

In accordance with Financial Accounting Standards Board (“FASB”) Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“FAS 146”), a liability for costs that will continue to be incurred under the lease agreement for the remaining term without economic benefit to the Company was recognized and measured at the lease’s fair value at the cease-use date on October 10, 2008. Accordingly, a charge of $264,000 was included in selling, general and administrative expenses in 2008 that increased deferred rent and lease incentives liability.

During the Company’s periodic review for impairment, net assets and liabilities related to one other studio were deemed impaired as of January 3, 2009 due to the inability of that studio to demonstrate that it could generate future cash flows in excess of operating expenses. An impairment charge of $174,000 was recorded in selling, general and administrative expenses in 2008. Construction-in-progress as of January 3, 2009 consisted primarily of computer software related to new information technology systems of approximately $2,540,000, which is within the Company’s planned expenditures for its systems implementation. In January 2009 the Company deferred the implementation of its new information technology systems because of the recession but believes that the implementation is probable within a reasonable timeframe. Consequently, an impairment charge was not deemed necessary.

In addition to the recoverability assessment, the Company routinely reviews the remaining estimated lives of its long-lived assets. Any reduction in the useful life assumption will result in increased depreciation and amortization expense in the period when such determinations are made, as well as in subsequent periods. These amounts will reduce net income or increase net losses.

Interest and other income and expenses

The Company records interest income when it is earned. The Company records interest expense as incurred. Other income in 2007 primarily consists of a net gain of $2,184,000 after related expenses as a result of the early termination of a studio lease per an agreement between the Company and the landlord.

Income Taxes

Income taxes are computed using the asset and liability method under FAS No. 109, “Accounting for Income Taxes” (“FAS 109”). Deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws currently in effect. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Accordingly, the Company recorded an income tax expense of $9,417,000 in 2008 due to a 100% valuation allowance established on net deferred tax assets because it is more likely than not that these assets will not be realized in the future. The valuation allowance was $14,813,000 as of January 3, 2009.

 

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Notes to Financial Statements - (continued)

 

The Company adopted the provisions of FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on December 31, 2006, the first day of the Company’s fiscal year 2007. Previously, the Company had accounted for tax contingencies in accordance with FAS No. 5, “Accounting for Contingencies”. As required by FIN 48, which clarifies FAS No. 109, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At December 31, 2006, the Company applied FIN 48 to all tax positions for which the statute of limitations remained open and determined there were no material unrecognized tax benefits as of that date. There were no material changes in unrecognized benefits during 2007. As a result, the adoption of FIN 48 did not have a material effect on the Company’s financial condition or results of operations. The Company is subject to income taxes in the U.S. federal jurisdiction, and various state jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2003. The Company has substantially concluded all material state and local income tax matters for years through 2001. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes for all periods presented, which were not significant.

Net Income (Loss) per Share

Basic income (loss) per share is calculated by dividing the Company’s net income (loss) available to the Company’s common stockholders for the period by the number of weighted average common shares outstanding for the period. Diluted income per share includes the effects of dilutive instruments, such as stock options and uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding.

The following table presents the incremental shares from potentially dilutive securities, calculated using the treasury stock method at the end of each fiscal period:

 

     Fiscal Years
(amounts in thousands)    2008    2007    2006

Shares used to compute basic income (loss) per share

   14,465    14,430    14,342

Add: Effect of dilutive options outstanding

      114   
              

Shares used to compute diluted income (loss) per share

   14,465    14,544    14,342
              

Options to purchase 2,383,000 and 1,532,000 shares of common stock that were outstanding as of January 3, 2009 and December 30, 2006, respectively, have been excluded from the calculation of diluted loss per share because inclusion of such shares would be anti-dilutive. Options to purchase an additional 1,759,000 shares of common stock that were outstanding as of December 29, 2007 have been excluded from the calculation of diluted income per share because their exercise prices were greater than the average market prices of the common shares.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss), unrealized mark-to-market gain (loss) on open derivatives, unamortized gain (loss) on settled derivatives and unrealized gain on available-for-sale securities. The components of comprehensive income (loss) are presented in the statements of stockholders’ equity and comprehensive income (loss).

 

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Derivative and Hedging Activities

The Company’s operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates. To mitigate its foreign currency exchange rate risk, the Company purchased foreign currency contracts to pay for merchandise purchases based on forecasted demand from 2006 to 2008. The objective of the Company’s foreign exchange risk management program is to manage the financial and operational exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on currency contract derivatives used to hedge those exposures. The Company maintains comprehensive hedge documentation that defines the hedging objectives, practices, procedures and accounting treatment. The Company’s hedging program and derivative positions and strategy are reviewed on a regular basis by management. The Company discontinued its hedging activities during the fourth quarter 2008.

The Company applies FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, for derivative instruments and requires that all derivatives be recorded at fair value on its balance sheet, including embedded derivatives The Company records derivatives related to cash flow hedges for foreign currency at fair value on its balance sheet, including embedded derivatives. The Company implemented a new hedging strategy in the first quarter 2007 to mitigate the impact of foreign currency fluctuations on inventory purchases. Foreign currency contracts entered into during January 2007 through April 2007 were not designated as cash flow hedge contracts. The Company accounted for non-hedge foreign currency contracts on a monthly basis by recognizing the net cash settlement gain or loss in other income (expense) and adjusting the carrying amount of open contracts to fair value by recognizing any corresponding gain or loss in other income (expense). In the second quarter 2007, the Company developed policies and procedures that met the criteria for cash flow hedge accounting. Foreign currency contracts entered into from May 2007 through 2008 were designated as cash flow hedge contracts and were accounted for on a monthly basis by adjusting the carrying amount of open designated contracts to fair value by recognizing any corresponding gain or loss in other comprehensive income (loss) and recognizing the net cash settlement gain or loss in other comprehensive income (loss). Subsequently, these net cash settlement gains or losses are being recognized in cost of sales as the underlying hedged inventory is sold in each reporting period. In the statements of cash flows, net cash settlement gain or loss is included in operating cash flows as changes in other assets, and as customer deposits and other liabilities.

The Company discontinued its hedging activities during the fourth quarter 2008 resulting in no open contracts as of January 3, 2009. Open hedge contracts were revalued to their fair value resulting in $51,000 in other current assets as of December 29, 2007. Derivatives used to manage financial exposures for foreign exchange risks generally matured within one year. The following table presents designated hedge contract activity for each fiscal period:

 

     Fiscal Years  
(amounts in thousands)    2008     2007     2006  

Increase (decrease) in carrying amount to fair value of open designated hedge contracts

   $     (51 )   $     51     $     (262 )

Amount of gain (loss) recognized in other comprehensive income (loss) upon settlement of designated hedge contracts

     (327 )     54       137  

Amount of (gain) loss reclassified to cost of sales from accumulated other comprehensive income (loss)

     194       (32 )     914  
                        

Other comprehensive income (loss) - Net gain (loss) on foreign currency cash flow hedges

   $ (184 )   $ 73     $ 789  
                        

 

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Management evaluates hedges for effectiveness, and for derivatives that are deemed ineffective, the ineffective portion is reported through earnings. The fair market value of the hedged exposure is presumed to be the market value of the hedge instrument when critical terms match. The Company did not record any amounts for ineffectiveness in 2008 and 2007. The Company recorded $69,000 for ineffectiveness in 2006.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“FAS 157”). This statement clarifies the definition of fair value and the methods used to measure fair value, and requires expanded financial statement disclosures about fair value measurements for assets and liabilities. The Company adopted provisions of FAS 157 on December 30, 2007, the first day of the Company’s fiscal year 2008, related to financial assets and liabilities, and other assets and liabilities carried at fair value on a recurring basis. The adoption of FAS 157 did not have a material effect on the Company’s financial condition or results of operations. The provisions of FAS 157 related to other nonfinancial assets and liabilities will be effective for the Company on January 4, 2009, the first day of the Company’s fiscal year 2009. The Company is currently evaluating the impact that these additional FAS 157 provisions will have on the Company’s financial statements.

In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), which replaces FAS No. 141, Business Combinations. FAS 141(R) retains the underlying concepts of FAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but FAS 141(R) changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. FAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008. Since the Company has no plans for business combination, its adoption of FAS 141(R) will not have any impact on the reporting of its results of operations.

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. This statement is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. This statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and that this minority interest be recorded separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. Since the Company does not have any consolidated subsidiaries, its adoption of ARB No. 51 will not have any impact on the reporting of its results of operations.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“FAS 161”), which changes the disclosure requirements for derivative instruments and hedging activities. FAS 161 is intended to enhance the current disclosure framework in FAS 133, Accounting for Derivative Instruments and Hedging Activities. FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Since FAS 161 requires enhanced disclosures, without a change to existing standards relative to measurement and recognition, the adoption of FAS 161 will not have any impact on the reporting of the Company’s results of operations.

 

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Notes to Financial Statements - (continued)

 

In April 2008, the FASB issued FAS Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”) which amends the list of factors an entity should consider in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Since the Company’s has no significant intangible assets, the adoption of FSP 142-3 will not have any impact on the reporting of its results of operations.

In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). Under FAS 162, the Generally Accepted Accounting Principles (“GAAP”) hierarchy will now reside in the accounting literature established by the FASB. FAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements in conformity with GAAP. FAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company anticipates that this statement will not have a significant impact on the reporting of its results of operations.

 

2. Fair Value of Financial Instruments

In accordance with FAS 157, a fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. FAS 157 also established a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). The following table presents information about assets and liabilities required to be carried at fair value on a recurring basis as of January 3, 2009:

 

(amounts in thousands)    Fair Value at
January 3,
2009
   Level 1    Level 2    Level 3

Cash and cash equivalents

   $             8,684    $     8,684    $     —    $     —

Cash and cash equivalents includes money market funds of $4,678,000 as of January 3, 2009. The Company primarily applies the market approach for recurring fair value measurements.

 

3. Inventory

 

(amounts in thousands)    January 3, 2009    December 29, 2007

Inventory in-transit between third-party manufacturers and the Company

   $                 2,309    $                 4,762

Inventory in-transit between the Company and its customers

     894      544
             

Inventory-in-transit

     3,203      5,306

Inventory on-hand, net of write-downs

     33,393      32,514
             

Total inventory

   $ 36,596    $ 37,820
             

Inventories were net of write-downs of $1,844,000 and $2,166,000 as of January 3, 2009 and December 29, 2007, respectively.

 

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Notes to Financial Statements - (continued)

 

4. Property and Equipment, Net

 

(amounts in thousands)    January 3, 2009     December 29, 2007  

Leasehold improvements

   $                 27,520     $                 25,498  

Computer equipment and software

     15,751       17,093  

Furniture and equipment

     7,399       5,795  
                
     50,670       48,386  

Less: accumulated depreciation and amortization

     (29,515 )     (28,130 )
                
     21,155       20,256  

Construction-in-progress

     2,547       3,046  
                

Total property and equipment, net

   $ 23,702     $ 23,302  
                

Furniture and equipment as of January 3, 2009 and December 29, 2007 includes $308,000 and $123,000 of capitalized equipment leases entered into during 2008 and 2007, respectively. Amortization of these capitalized leases was $24,000 and $15,000 in 2008 and 2007, respectively, which was included in depreciation and amortization expense. Construction-in-progress as of January 3, 2009 consisted primarily of computer software related to new information technology systems of approximately $2,540,000. In January 2009 the Company deferred the implementation of new information technology systems because of the recession but believes that the implementation is probable within a reasonable timeframe. The Company currently plans to resume implementation when sales increase and cash flow becomes available. Construction-in-progress as of December 29, 2007 consisted primarily of computer software related to new information technology systems and website enhancements of approximately $2,366,000 and leasehold improvements related to studios under construction of approximately $680,000. In 2008, $24,000 of interest was capitalized in construction-in-progress of the total incurred interest costs of $345,000. Depreciation and amortization expense related to the Company’s property and equipment was $6,215,000, $7,056,000 and $8,919,000 in 2008, 2007, and 2006, respectively.

On October 1, 2005, the Company shortened the estimated useful lives for certain computer systems from three years to 18 months as a result of its plans to replace them. This change resulted in additional depreciation expense in 2006 of approximately $1,000,000. Depreciation expense decreased by approximately $2,263,000 in 2007 from 2006 as these assets became fully depreciated.

 

5. Loan Agreement

On February 2, 2007, the Company entered into a Loan, Guaranty and Security Agreement (the “Loan Agreement”) with Wells Fargo Retail Finance, LLC (“Wells Fargo”). The Loan Agreement expires on February 2, 2012 and provides for an initial overall credit line up to $20,000,000, which may be increased to $25,000,000 at the Company’s option provided the Company is not in default on the Loan Agreement. The Loan Agreement consists of a revolving credit line and letters of credit up to $5,000,000. The amount the Company may borrow at any time under the Loan Agreement is based upon a percentage of eligible inventory and accounts receivable less certain reserves. Borrowings are secured by the right, title and interest to all of the Company’s personal property, including cash, accounts receivable, inventory, equipment, fixtures, general intangibles and intellectual property. The Loan Agreement contains various restrictive covenants, including maximum availability, which is the amount the Company may borrow under the Loan Agreement, less certain outstanding obligations, plus certain cash and cash equivalents, restrictions on payment of dividends, limitations on indebtedness, limitations on subordinated indebtedness and limitations on the amount of capital expenditures the Company may incur in any fiscal year. The Company is currently in compliance with all of these restrictive covenants.

 

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Notes to Financial Statements - (continued)

 

In the fourth quarter 2008, bank commissioned appraisals determined that the net liquidation value of the Company’s inventories had declined due to general market conditions and, as a result, the advance rates were reduced which constricted the availability of borrowings under the line of credit to approximately $16,782,000 as of January 3, 2009. The availability of borrowings may continue to decrease if general market conditions decline further.

On March 18, 2009, the Company entered into a first amendment to the Loan Agreement and a securities account availability agreement with Wells Fargo in which Wells Fargo increased the amount of advances otherwise available to the Company by $1,000,000 in exchange for the Company’s granting Wells Fargo collateral rights to a deposit account of the Company with a balance of approximately $4,678,000. From such accounts, Wells Fargo will permit the Company to withdraw amounts in excess of $2,000,000 so long as no Default or Event of Default has occurred. In addition, Wells Fargo rescinded its decision to require additional discretionary reserves of $1,500,000.

Interest on borrowings will be either at Wells Fargo’s prime rate, or LIBOR plus 1.25% to 1.75% based upon average availability and the unused credit line fee is 0.3%. In the event of default, the Company’s interest rates will be increased by approximately two percentage points. The interest rate on outstanding borrowings at January 3, 2009 was 3.25%. As of January 3, 2009, the Company had outstanding borrowings of $13,949,000 under the revolving credit line and $1,439,000 in outstanding letters of credit. Advances of $1,394,000 were available under the revolving credit line as of January 3, 2009.

 

6. Long-term Debt

Notes Payable

In June 2006, the Company financed a portion of its new information technology project with a three-year promissory note of approximately $1,000,000 with an interest rate of approximately 2.0%. In accordance with Accounting Principals Board No. 21 “Interest on Receivables and Payables” (“APB 21”), the Company discounted this note to its fair value. The discounted portion of approximately $58,000 is being amortized as interest expense over the life of the note using the effective interest method. As of January 3, 2009, the Company’s outstanding borrowings under this and other notes were $198,000 with interest rates ranging from 2% to 6.75% maturing in 2009.

Capitalized Leases

The following table presents minimum lease payments under capitalized leases together with the present value of the minimum lease payments as of January 3, 2009:

 

Fiscal Years

(amounts in thousands)

   Capital Lease
Obligations
 

2009

   $                 66  

2010

     66  

2011

     66  

2012

     62  

2013

     47  
        

Total minimum lease payments

     307  

Less: Interest

     (28 )
        

Present value of net minimum lease payments

   $ 279  
        

 

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Notes to Financial Statements - (continued)

 

7. Commitments and Contingencies

The Company is a party to a variety of contractual agreements under which the Company may be obligated to indemnify the other party for certain matters. These contracts primarily relate to the Company’s commercial contracts, operating leases, trademarks, intellectual property, financial agreements and various other agreements. Under these contracts, the Company may provide certain routine indemnifications relating to representations and warranties (e.g. ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined.

Generally, the maximum obligation under such indemnifications is not explicitly stated and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, the Company has not made significant payments for these indemnifications. The Company believes that if it were to incur a loss in any of these matters, the loss would not have a material effect on its financial condition or results of operations.

Operating Leases

The Company leases office space, studios and fulfillment center space under operating leases. The following table presents future minimum lease payments as of January 3, 2009:

 

Fiscal Years

(amounts in thousands)

   Operating Lease
Obligations

2009

   $                 15,383

2010

     14,265

2011

     13,304

2012

     13,216

2013

     12,681

Thereafter

     22,627
      
   $ 91,476
      

Rent expense, including common area maintenance and other lease required expenses for all operating leases, totaled $18,490,000, $16,176,000 and $15,053,000 in 2008, 2007 and 2006, respectively, which includes minimum rental expense of $15,571,000, $13,769,000 and $13,366,000 in 2008, 2007 and 2006, respectively. Rent expense includes step rent provisions, escalation clauses and other lease concessions accounted for on a straight-line basis over the minimum term of the lease.

Purchase Obligations

As of January 3, 2009, inventory purchase obligations related to open purchase orders were approximately $10,740,000, commitments for furniture, fixtures, and leasehold improvements related to studios were approximately $193,000, and commitments for software licenses, software maintenance, hosting, and development services for various information technology systems and website were approximately $1,790,000.

Litigation

From time to time, the Company may be involved in legal proceedings and litigation incidental to the normal conduct of its business. The Company is not currently involved in any material legal proceedings or litigation.

 

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Design Within Reach, Inc.

Notes to Financial Statements - (continued)

 

8. Stockholders’ Equity

Employee Stock Purchase Plan

The Design Within Reach, Inc. Employee Stock Purchase Plan (the “ESPP”) allows employees to purchase Company common stock at a 15% discount to market price through payroll deductions. The Company initially registered 300,000 shares of Common Stock for purchase under the ESPP. The reserve automatically increases on each December 31 during the term of the plan by an amount equal to the lesser of 100,000 shares or a lesser amount determined by the board of directors. As of January 3, 2009, 715,000 shares were available for grant. Under the ESPP, 16,000 and 8,000 shares were issued in 2008 and 2006, respectively. In 2007, no shares were issued under the ESPP as sales of shares under the ESPP were suspended pending the Company becoming current on its SEC periodic reports. On October 16, 2007, the Company amended the ESPP. The amended ESPP changed the offering periods from concurrent twelve month offering periods to six month offering periods, commencing on December 1 and June 1.

Equity Incentive Plan

The Design Within Reach, Inc. 2004 Equity Incentive Award Plan (the “2004 Plan”) and the Design Within Reach, Inc. 1999 Stock Plan (the “1999 Plan” and together with the 2004 Plan, the “Plans”) allow for the issuance of incentive stock options and nonstatutory stock options to purchase shares of the Company’s common stock. In June 2008 and June 2006, the Company’s stockholders approved amendments to the 2004 Plan that provided for an increase in the number of shares of the Company’s common stock reserved for issuance under the 2004 plan. As of January 3, 2009, the Company has authorized and reserved 3,000,000 shares for issuance under the 2004 Plan, of which 901,000 shares are available for grant. As of January 3, 2009, the Company has authorized and reserved 826,000 shares for issuance under the 1999 Plan, of which 542,000 shares are available for grant. Issuances under the 1999 Plan were not made in 2008, will not be made in 2009 and are not allowed after January 2009 when the 1999 Plan reaches its statutory ten year life. The 1999 Plan will continue in effect until all outstanding stock options issued under the 1999 Plan have been exercised, forfeited or expire in 2015.

Under the Plans, incentive stock options may be granted only to employees, and nonstatutory stock options may be granted to employees, outside directors and consultants. Options granted under the Plans are for periods not to exceed ten years, and must be issued at prices not less than 100% of the fair market value for incentive stock options and not less than 85% of fair market value for nonstatutory options. Incentive stock options granted to stockholders who own greater than 10% of the outstanding stock must be issued at prices not less than 110% of the fair market value of the stock on the date of grant. Shares subject to cancelled options are returned to their respective Plan and are available to be reissued. Options granted under the Plans generally vest within three to four years. The Plans allow certain options to be exercised prior to the time such options are vested. All unvested shares are subject to repurchase at the exercise price paid for such shares, at the option of the Company. There have not been any early exercises.

 

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Design Within Reach, Inc.

Notes to Financial Statements - (continued)

 

Summary of Stock Option Plans

The following table presents the Company’s stock option activity for both Plans during 2008, 2007 and 2006:

 

     Shares
(in thousands)
    Weighted
Average
Exercise Price
   Weighted Average
Remaining
Contractual Term
(in years)
   Aggregate
Intrinsic value
(in thousands)
          
          
          

Balance, December 31, 2005

   1,717     $                 7.98      

Options granted

   1,197       6.72      

Options exercised

   (363 )     0.94      

Options canceled

   (1,019 )     10.47      
              

Balance, December 30, 2006

   1,532       7.01      

Options granted

   814       5.48      

Options exercised

   (37 )     1.09      

Options canceled

   (307 )     7.26      
              

Balance, December 29, 2007

   2,002       6.46      

Options granted

   727       2.48      

Options exercised

   (9 )     0.96      

Options canceled

   (337 )     6.51      
              

Balance, January 3, 2009

   2,383     $ 5.26    6.9    $                     18
              

Vested and expected to vest at January 3, 2009

   2,059     $ 5.51    6.8    $ 18

Exercisable, January 3, 2009

   1,407     $ 6.50    6.2    $ 18

The weighted average fair value per share of options granted during 2008, 2007 and 2006 was $1.41, $3.06 and $3.26, respectively. The total intrinsic value of options exercised during 2008, 2007 and 2006, was $25,000, $147,000 and $2,100,000, respectively.

Stock-based compensation expense relating to stock options was $1,438,000, $2,270,000 and $1,881,000 in 2008, 2007, and 2006, respectively. No income tax benefit was recognized in 2008 for stock-based compensation arrangements because of the valuation allowance. Total income tax benefit recognized in the statements of operations for stock-based compensation arrangements was approximately $508,000 and $400,000 in 2007 and 2006, respectively. As of January 3, 2009, there was approximately $1,901,000 of unrecognized compensation cost, before income taxes, related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.9 years. The total fair value of shares vested during 2008, 2007 and 2006 was $3,399,000, $3,577,000 and $2,597,000, respectively.

 

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Design Within Reach, Inc.

Notes to Financial Statements - (continued)

 

The following table presents information about stock options outstanding as of January 3, 2009:

 

Options Outstanding

  

Options Exercisable

Range of

Exercise

Prices

  

Number

of

Shares

(in thousands)

  

Weighted
Average
Remaining Life

(in years)

  

Weighted
Average
Exercise Price

  

Number of
Exercisable
Shares

(in thousands)

  

Weighted
Average
Exercise Price

$    0.25 - 0.75    258    6.9    $                0.67    108    $                0.55
   1.23 - 3.02    333    7.5    2.34    62    2.79
   3.10 - 4.59    374    7.6    3.99    102    4.51
   5.37 - 5.41    687    7.6    5.39    523    5.40
   5.58 - 5.92    297    4.6    5.71    220    5.70
   6.03 - 7.23    169    5.7    6.45    130    6.52
   12.00 - 19.00    265    6.9    13.56    262    13.50
                     
$    0.25 - 19.00    2,383    6.9    $                5.26    1,407    $                6.50
                     

Stockholder Rights Plan

On May 23, 2006, the Board of Directors of the Company adopted a Stockholder Rights Plan (the “Rights Plan”) designed to protect its stockholders in the event of a proposed takeover. The Rights Plan, which expires in 2016, will not prevent a takeover, but will encourage anyone seeking a takeover of the Company to negotiate with the Board of Directors first. The Rights Plan was not approved in response to any specific effort to acquire control of the Company. As part of the Rights Plan, the Board of Directors declared a dividend distribution of the right to purchase from the Company one one-thousandth (1/1000th) of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share (the “Preferred Shares”), at a price of $50.00 per one one-thousandth (1/1000th) of a Preferred Share on each outstanding share of the Company’s common stock, subject to certain anti-dilution adjustments.

Subject to some exceptions, the rights will be exercisable if a person or group acquires 15 percent or more of the Company’s common stock or announces a tender offer for 15 percent or more of the common stock. Because of the nature of the Preferred Shares’ dividend, liquidation and voting rights, the value of one one-thousandth of a Preferred Share purchasable upon exercise of each right should approximate the value of one share of common stock. The Company adopted an amendment to the Rights Plan on December 13, 2007, which created limited exceptions to the Rights Plan’s 15% beneficial ownership limit. Under these exceptions, individuals and entities affiliated with Glenhill Advisors, LLC (“Glenhill”) and individuals and entities affiliated with Sun Capital Securities, LLC (“Sun”) will be subject to a 17.5% beneficial ownership limit so long as they report or are required to report their ownership on Schedule 13G or Schedule 13D under the Securities Exchange Act of 1934, as amended, and their Schedule 13G or Schedule 13D does not state or is not required to state any present intention to hold such common stock with the purpose or effect of changing or influencing the control of the Company, nor in connection with or as a participant in any transaction having such purpose or effect.

 

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Design Within Reach, Inc.

Notes to Financial Statements - (continued)

 

The Company adopted a second amendment to the Rights Plan on February 12, 2009 that is intended to provide stockholders with greater flexibility to confer with one another and make joint proposals to acquire the Company in the certain circumstances without triggering the rights. First, the second amendment provides that stockholders may enter into an agreement, arrangement or understanding with one another relating to making a joint proposal to acquire the Company without being treated as a group for purposes of applying the 15% or 17.5% threshold, as the case may be. For the exception created by the second amendment to be applicable, the agreement, understanding or arrangement must relate solely to their making a proposal on or before April 30, 2009, which: is addressed to the Board of Directors of the Company or a committee of the Board in response to a solicitation for such proposals by the Board or such committee; and is for a negotiated transaction pursuant to which the bidding entities and individuals would acquire all or substantially all of the assets of the Company or shares of capital stock, which taken together with shares already held by the bidders represent greater than 50% of the outstanding voting securities of the Company. Secondly, the second amendment creates limited exceptions to the requirement that Glenhill and Sun must hold their shares as passive investors if they hold more than 15% but less than 17.5% of the outstanding common stock. Under the second amendment, neither Glenhill nor Sun will lose the right to hold more than 15% but less than 17.5% of the outstanding common stock without triggering the rights by virtue of filing a Schedule 13D amendment that discloses that it intends to make, or has made, a proposal for a negotiated transaction to the Board of Directors of the Company or a committee of the Board, so long as: the proposal is made on or before April 30, 2009 in response to a solicitation by the Board of Directors of the Company or a committee of the Board; and the proposal calls for Glenhill or Sun, separately or together with one or more other entities or individuals, to acquire all or substantially all of the Company’s assets or shares of capital stock of the Company, which taken together with shares already held by individual or entity represent greater than 50% of the outstanding voting securities of the Company.

In the event of any merger, consolidation or other transaction in which shares of common stock are exchanged, each Preferred Share will be entitled to receive 1,000 times the amount received per share of common stock. Until the rights are exercised, the holders of the rights, as such, will have no rights as stockholders of the Company beyond those as an existing stockholder, including, without limitation, the right to vote or to receive dividends. If the Company is acquired in a merger, or another way that has not been approved by the Board of Directors, each right will entitle its holder to purchase a number of the acquiring company’s common shares having a market value at that time of twice the right’s exercise price. The dividend was payable to stockholders of record on June 2, 2006.

The rights may be redeemed in whole, but not in part, at a price of $0.01 per right (the “Redemption Price”) by the Board of Directors at any time prior to the time that the rights have become exercisable. The redemption of the rights may be made effective at such time, on such basis and with such conditions as the Board of Directors in its sole discretion may establish. Immediately upon any redemption of the rights, the right to exercise the rights will terminate and the only right of the holders of rights will be to receive the Redemption Price.

On May 25, 2006, the Company filed a Certificate of Designations setting forth the terms of the Preferred Shares with the Delaware Secretary of State.

 

9. Employee Benefit Plan

The Company sponsors a 401(k) retirement savings plan covering all employees who meet certain eligibility requirements. The Company did not make a discretionary contribution to the plan in 2008, 2007 or 2006.

 

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Design Within Reach, Inc.

Notes to Financial Statements - (continued)

 

10. Income Taxes

The following table presents the provision for income taxes for each fiscal period:

 

     Fiscal Years
(amounts in thousands)    2008    2007    2006

Current

        

Federal

   $    $ 69    $ (2,145)

State

     42      (56)      5
                    

Total current

     42      13      (2,140)
                    

Deferred

        

Federal

     6,569      629      (1,239)

State

     2,806      84      (1,214)
                    

Total deferred

     9,375      713      (2,453)
                    

Net income tax expense (benefit)

   $     9,417    $     726    $     (4,593)
                    

 

The following table presents a reconciliation of the statutory federal income tax rate with the Company’s effective income tax rate for each fiscal period:

 

     Fiscal Years
     2008    2007    2006

Statutory federal rate

     (34.0)%      34.0%      (34.0)%

State income taxes, net of federal income tax benefit

     (5.5)%      1.7%      (6.1)%

Stock options

     2.2 %      31.9%      2.1 %

Tax exempt interest

               (0.6)%

Valuation allowance

     99.6 %          

Enterprise zone credit and other

     2.8 %      1.4%      2.9 %
                    

Effective tax rate

     65.1 %      69.0%      (35.7)%
                    

 

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Design Within Reach, Inc.

Notes to Financial Statements - (continued)

 

Deferred income taxes reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The following table presents temporary differences and carryforwards, which give rise to deferred tax assets and liabilities, at the end of each fiscal period:

 

     Fiscal Years  
(amounts in thousands)    2008     2007  

Deferred tax assets:

  

Current:

    

Accruals and reserves

   $     1,571     $     1,865  

Deferred gross margin

     250       75  

Other

     234       268  
                

Total current deferred tax assets

     2,055       2,208  
                

Non-Current:

    

Net operating losses

     5,501       1,439  

Credit carry forward

     722       725  

Deferred rent and lease incentives

     2,698       1,089  

Property and equipment basis differences

     3,578       4,012  

Stock options

     1,381       1,290  

Other

     104       44  
                

Total non-current deferred tax assets

     13,984       8,599  
                

Current deferred tax liabilities - State taxes

     1,226       957  
                

Net deferred tax assets before valuation allowance

     14,813       9,850  

Valuation allowance

     (14,813 )     (417 )
                

Net deferred tax assets

           9,433  
                

The Company has net operating loss carryforwards of approximately $11,520,000 and $18,776,000 as of January 3, 2009 for federal and state income taxes, respectively. These net operating loss carryforwards will generally expire between 2025 and 2028 except for California state net operating loss carryforwards which will expire between 2017 and 2020. The Company also has federal alternative minimum tax credits of approximately $305,000 which may be carried forward indefinitely. In addition, the Company has California Enterprise Zone credits of $417,000 that may be used for an indefinite period of time. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Accordingly, the Company recorded an income tax expense of $9,417,000 in 2008 due to a 100% valuation allowance established on net deferred tax assets because it is more likely than not that these assets will not be realized in the future. The valuation allowance was $14,813,000 as of January 3, 2009. Utilization of the net operating losses and tax credits may be subject to a substantial annual limitation due to the ownership change limitations provided by Sections 382 and 383 of the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of net operating losses and tax credits before utilization.

As a result of the adoption of FAS 123R, beginning in 2006, the excess tax benefits associated with the exercise of stock options are recorded directly to stockholders’ equity when realized.

 

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Design Within Reach, Inc.

Notes to Financial Statements - (continued)

 

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 prescribes a recognition and measurement threshold for a tax position taken or expected to be taken in a tax return. FIN 48 was effective commencing December 31, 2006, the first day of the Company’s fiscal year 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits.

 

11. Related Party Transactions

The Company rents studio space from an affiliate of the Chairman of the Company’s Board of Directors. Rent expense applicable to this space was approximately $160,000 for 2008, 2007 and 2006.

 

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Design Within Reach, Inc.

Notes to Financial Statements - (continued)

 

12. Quarterly Financial Data (Unaudited)

The following table presents certain unaudited consolidated quarterly financial information for each of the four quarters ended January 3, 2009 and December 29, 2007. This quarterly information has been prepared on the same basis as the Financial Statements and includes all adjustments necessary to state fairly the information for the periods presented. The results of operations for any quarter are not necessarily indicative of results for the full year or for any future period.

The Company operates on a 52- or 53-week fiscal year. Each fiscal year consists of four 13-week quarters, with an extra week added onto the fourth quarter every four to six years. Fiscal year 2008 consisted of 53 weeks, and fiscal year 2007 consisted of 52 weeks. Consequently, all the quarters presented below consisted of 13 weeks except for the quarter ended January 3, 2009 that consisted of 14 weeks.

 

     Quarter Ended  
(amounts in thousands, except
per share data)
   January 3, 2009     September 27, 2008     June 28, 2008     March 29, 2008  

Net Sales

   $                   42,413     $                     42,316     $             47,260     $             46,914  

Gross margin

     16,667       17,327       21,935       22,176  

Loss from operations

     (7,860 )     (4,516 )     (771 )     (1,183 )

Net loss

     (17,566 )     (5,638 )     (159 )     (622 )

Net loss per share:

        

Basic

   $ (1.21 )   $ (0.39 )   $ (0.01 )   $ (0.04 )

Diluted

   $ (1.21 )   $ (0.39 )   $ (0.01 )   $ (0.04 )

Shares used in per share calculation:

        

Basic

     14,473       14,471       14,462       14,455  

Diluted

     14,473       14,471       14,462       14,455  
     Quarter Ended  
     December 29, 2007     September 29, 2007     June 30, 2007     March 31, 2007  

Net Sales

   $ 51,994     $ 49,026     $ 49,068     $ 43,848  

Gross margin

     25,054       21,805       21,718       18,345  

Income (loss) from operations

     3,186       504       (520 )     (3,899 )

Net income (loss)

     2,270       2,433       (575 )     (3,805 )

Net income (loss) per share:

        

Basic

   $ 0.16     $ 0.17     $ (0.04 )   $ (0.26 )

Diluted

   $ 0.16     $ 0.17     $ (0.04 )   $ (0.26 )

Shares used in per share calculation:

        

Basic

     14,450       14,433       14,421       14,418  

Diluted

     14,543       14,567       14,421       14,418  

 

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Notes to Financial Statements - (continued)

 

13. Subsequent Events

In February 2009 the Company engaged Thomas Weisel Partners LLC (“TWP”), an investment banking firm headquartered in San Francisco, CA, to assist in the review of strategic alternatives, including advice related to an unsolicited offer recently received by the Company. The Company’s Board of Directors appointed a committee of independent directors to work with TWP and consider a full range of possible alternatives, including, among other things, a possible sale, merger, strategic partnership or refinancing. The Company currently has no commitments or agreements with respect to any particular transaction, and there can be no assurance that its review of strategic alternatives will result in any transaction.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    DESIGN WITHIN REACH, INC.
   

Dated: April 1, 2009

  By:    

/s/ Ray Brunner

    Ray Brunner
   

President, Chief Executive Officer and Director

(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Dated: April 1, 2009   By:    

/s/ Ray Brunner

    Ray Brunner
    President, Chief Executive Officer and Director (Principal Executive Officer)
Dated: April 1, 2009   By:    

/s/ Theodore R. Upland III

    Theodore R. Upland III
   

Vice President, Chief Financial Officer

(Principal Financial and Accounting Officer)

Dated: April 1, 2009

  By:    

/s/ John Hansen

    John Hansen
    Chairman of the Board and Director

Dated: April 1, 2009

  By:    

/s/ Hilary Billings

    Hilary Billings
    Director

Dated: April 1, 2009

  By:    

/s/ Terry Lee

    Terry Lee
    Director

Dated: April 1, 2009

  By:    

/s/ Peter Lynch

    Peter Lynch
    Director

Dated: April 1, 2009

  By:    

/s/ William McDonagh

    William McDonagh
    Director

Dated: April 1, 2009

  By:    

/s/ James Peters

    James Peters
    Director

Dated: April 1, 2009

  By:    

/s/ Lawrence Wilkinson

    Lawrence Wilkinson

 

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