UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22963
BIG DOG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1868665
(State or jurisdiction of (IRS employer
incorporation or organization) identification no.)
121 GRAY AVENUE
SANTA BARBARA, CALIFORNIA 93101
(Address of principal executive offices) (zip code)
(805) 963-8727
(Registrant's telephone number,including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.)
Yes X No
--- ---
The number of shares outstanding of the registrant's common stock, par value
$.01 per share, at May 1, 2004 was 8,247,232 shares.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
NO.
----
PART 1. FINANCIAL INFORMATION (Unaudited)...........................3
ITEM 1: FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED BALANCE SHEETS
March 31, 2004 and December 31, 2003........................3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, 2004 and 2003......... ........4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2004 and 2003..................5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................12
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.16
ITEM 4: CONTROLS AND PROCEDURES....................................16
PART II: OTHER INFORMATION..........................................17
ITEM 1: LEGAL PROCEEDINGS..........................................17
ITEM 2: CHANGES IN SECURITIES,USE OF PROCEEDS AND ISSUER
PURCHASE OF EQUITY SECURITIES..............................17
ITEM 3: DEFAULTS UPON SENIOR SECURITIES............................17
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........17
ITEM 5: OTHER INFORMATION..........................................17
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K...........................17
SIGNATURES...................................................................18
PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, December 31,
2004 2003
------------------------- ------------------
ASSETS (Notes 2 and 3)
CURRENT ASSETS:
Cash and cash equivalents...................................... $1,251,000 $ 10,503,000
Accounts receivable, net....................................... 413,000 116,000
Inventories.................................................... 41,776,000 24,752,000
Prepaid expenses and other current assets...................... 1,280,000 789,000
Deferred income taxes.......................................... 2,604,000 875,000
------------------------- ------------------
Total current assets......................................... 47,324,000 37,035,000
PROPERTY AND EQUIPMENT, Net ...................................... 10,653,000 4,144,000
INTANGIBLE ASSETS, Net............................................ 214,000 211,000
DEFERRED INCOME TAXES ............................................ 1,053,000 946,000
OTHER ASSETS......................................................... 433,000 246,000
------------------------- ------------------
TOTAL............................................................. $59,677,000 $ 42,582,000
========================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (Notes 2 and 3)
CURRENT LIABILITIES:
Short-term borrowings.......................................... $7,061,000 $ ----
Redeemable convertible notes.................................. 4,992,000 ----
Accounts payable............................................... 7,270,000 1,932,000
Income taxes payable........................................... 38,000 1,513,000
Accrued expenses and other current liabilities................. 5,628,000 4,016,000
------------------------- ------------------
Total current liabilities.................................... 24,989,000 7,461,000
LONG TERM BORROWINGS.............................................. 1,944,000 ----
NOTE PAYABLE...................................................... 487,000 ----
CAPITAL LEASE OBLIGATIONS......................................... 139,000 ----
DEFERRED RENT..................................................... 597,000 606,000
DEFERRED GAIN ON SALE-LEASEBACK................................... 287,000 301,000
------------------------- ------------------
Total liabilities.............................................. 28,443,000 8,368,000
------------------------- ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 3,000,000 shares authorized,
none issued and outstanding.................................. ---- ----
Common stock, $.01 par value, 30,000,000 shares authorized,
9,702,384 and 9,698,284 issued at March 31, 2004 and
December 31, 2003, respectively.............................. 97,000 97,000
Additional paid-in capital..................................... 20,526,000 20,510,000
Retained earnings.............................................. 18,465,000 21,461,000
Treasury stock, 1,455,152 shares at March 31, 2004 and
December 31, 2003............................................ (7,854,000) (7,854,000)
------------------------- ------------------
Total stockholders' equity................................... 31,234,000 34,214,000
------------------------- ------------------
TOTAL............................................................. $59,677,000 $ 42,582,000
========================= ==================
See notes to the consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended
March 31,
2004 2003
----------------- ---------------
NET SALES........................................................ $ 21,880,000 $15,354,000
COST OF GOODS SOLD............................................... 10,659,000 7,251,000
----------------- ---------------
GROSS PROFIT..................................................... 11,221,000 8,103,000
----------------- ---------------
OPERATING EXPENSES:
Selling, marketing and distribution........................... 14,132,000 11,311,000
General and administrative.................................... 1,797,000 1,201,000
----------------- ---------------
Total operating expenses.................................. 15,929,000 12,512,000
----------------- ---------------
LOSS FROM OPERATIONS............................................. (4,708,000) (4,409,000)
INTEREST EXPENSE................................................. 124,000 62,000
----------------- ---------------
LOSS BEFORE BENEFIT
FOR INCOME TAXES ............................................. ( 4,832,000) (4,471,000)
BENEFIT FOR INCOME TAXES......................................... (1,836,000) (1,721,000)
----------------- ---------------
NET LOSS......................................................... $ (2,996,000) $(2,750,000)
================= ===============
NET LOSS PER SHARE
BASIC AND DILUTED............................................. $ (0.36) $ (0.33)
================= ===============
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC AND DILUTED............................................. 8,244,000 8,393,000
================= ===============
See notes to the consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
March 31,
-------------------------------------
2004 2003
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...............................................................$ (2,996,000) $(2,750,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization...................................... 643,000 571,000
Compensation expense............................................... 328,000 ---
Amortization of deferred financing fees............................ 38,000 38,000
Provision for losses on receivables................................ 5,000 13,000
Loss on disposition of property and equipment...................... 9,000 8,000
Deferred income taxes.............................................. (1,836,000) (1,768,000)
Changes in operating assets and liabilities:
Receivables................................................... (301,000) 278,000
Inventories................................................... (4,270,000) (4,989,000)
Prepaid expenses and other assets............................. 1,218,000 (492,000)
Accounts payable.............................................. 3,545,000 3,807,000
Income taxes payable.......................................... (1,475,000) (541,000)
Accrued expenses and other current liabilities................ (3,580,000) (1,591,000)
Deferred rent................................................. (9,000) (40,000)
Deferred gain on sale-leaseback............................... (14,000) (14,000)
---------------- --------------
Net cash used in operating activities..................... (8,695,000) (7,470,000)
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................... (199,000) (213,000)
Acquisition of The Walking Company, net of cash acquired............... (1,577,000) ---
Other.................................................................. --- (5,000)
---------------- -------------
Net cash used in investing activities..................... (1,776,000) (218,000)
---------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under lines of credit agreement......................... 1,207,000 2,637,000
Exercise of stock options.............................................. 16,000 ---
Repayment of capital lease obligations................................. (4,000) ---
---------------- -------------
Net cash used in financing activities..................... 1,219,000 2,637,000
---------------- -------------
NET DECREASE IN CASH........................................................ (9,252,000) (5,051,000)
CASH, BEGINNING OF PERIOD................................................... 10,503,000 6,194,000
---------------- -------------
CASH, END OF PERIOD.......................................................$ 1,251,000 $ 1,143,000
================ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest......................................................... $ 29,000 $ 25,000
Income taxes......................................................$ 1,468,000 $ 588,000
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING ACTIVITIES:
ACQUISITION OF THE WALKING COMPANY:
Working capital, other than cash..................................$ 197,000
Properties......................................................... 6,962,000
Redeemable convertible notes and rights assumed.................... (4,998,000)
Notes payable...................................................... (584,000)
---------------
Net cash effect due to acquisition of net assets
of The Walking Company .........................................$ 1,577,000
==============
See notes to the consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
in the United States of America for interim financial information and with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
The interim financial statements for the three months ended March
31, 2004 contain the results of operations since March 3, 2004, of the
Company's acquisition of primarily all the assets of The Walking Company.
For a complete description of the acquisition see Note 2 below.
In the opinion of management, all adjustments, consisting only of
normal recurring entries necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 2004
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2004. For further information, refer to the
financial statements and footnotes thereto for Big Dog Holdings, Inc. and
its subsidiaries (the "Company") included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2003.
NOTE 2. The Walking Company Acquisition
On March 3, 2004 (the "acquisition date"), the Company acquired
substantially all of the assets and assumed certain liabilities of The
Walking Company (the "acquisition"), pursuant to an asset purchase
agreement for a purchase price of approximately $22 million (subject to
adjustment). The Walking Company is a leading independent specialty
retailer of high quality, technically designed comfort walk wear and
accessories. The Walking Company had total annual sales of approximately
$74 million in 2003 and had been operating under the protection of the U.S.
Bankruptcy Court since July 2003. The Company was selected as the highest
and best bidder for The Walking Company assets at a U.S. Bankruptcy Court
ordered auction, which was confirmed on March 2, 2004.
Under the terms of the asset purchase agreement, a subsidiary of
the Company acquired substantially all of the assets of The Walking Company
including, but not limited to, the inventory and fixed assets of 72 stores
located in 28 states and trademarks, all of which will be used by the
subsidiary to continue the business under the name "The Walking Company"
("TWC"). As a result of the acquisition, the Company believes operational
synergies will be obtained leading to future growth and profitability. The
transaction was accounted for under the purchase method of accounting, and
accordingly the results of operations of TWC have been consolidated in the
Company financial statements since the acquisition date.
The purchase price consisted of approximately $1.7 million in
cash, $5.6 million in issuance of notes and rights, $14.5 million of
assumption of accounts payable, accrued expenses and other liabilities
(including acquisition related costs of $1.7 million.) The Company funded
the cash portion of the purchase price by drawing upon existing and new
lines of credit, and from available cash.
The total purchase consideration has been allocated to the assets
and liabilities acquired based on their respective estimated fair values
as summarized below. The purchase price allocation is subject to change
and will be finalized upon review and refinement of certain estimates and
completion of valuation and appraisals.
Cash and cash equivalents. $ 123,000
Inventories 12,754,000
Other current assets 1,944,000
Property, plant and equipment 6,962,000
------------
Total assets acquired $ 21,783,000
------------
Current and other liabilities $ 14,501,000
Notes payable and rights issued 5,582,000
------------
Total liabilities assumed $ 20,083,000
------------
Net assets acquired over liabilities $ 1,700,000
============
The following table presents unaudited pro forma results of the
combined operations for the three months ended March 31, 2004 and 2003,
respectively, as if the acquisition had occurred as of the beginning of
such periods rather than as of the acquisition date. The pro forma
information presented below is for illustrative purposes only and is not
indicative of results that would have been achieved or results which may
be achieved in the future:
Three Months Ended March 31,
---------------------------
2004 2003
---- ----
Net sales $ 30,199,000 $ 29,163,000
Net loss (3,547,000) (4,355,000)
Net loss per common share:
Basic and diluted $ (0.43) $ (0.52)
The pro forma results have been prepared based on available information,
using assumptions that the Company's management believes are reasonable
and include no significant non-recurring items. The results do not purport
to represent the actual financial position or results of operations that
would have occurred if the acquisition had occurred on the dates specified.
The results above are not necessarily indicative of the results that may
be achieved in the future. These results also do not reflect any
adjustments for the effect of certain operating synergies or expected cost
reductions that the Company may realize as a result of the acquisition. No
assurances can be given that the amount of financial benefits, if any, may
actually be realized as the result of the acquisition.
NOTE 3. Debt
Short-term Borrowings
---------------------
In October 2001, the Company entered into a credit facility with
Wells Fargo Retail Finance, which was most recently amended in April 2004
(the "Amended Credit Agreement"). The Amended Credit Agreement, which
expires in March 2007, provides for a total commitment of $28,000,000 with
the ability for the Company to issue documentary and standby letters of
credit of up to $3 million. The Company's ability to borrow under the
facility is determined using an availability formula based on eligible
assets. The facility is collateralized by substantially all of the
Company's assets and requires daily, weekly and monthly financial reporting
as well as compliance with financial, affirmative and negative covenants.
Prior to the amendment, the most significant of these financial covenants
was compliance with certain pre-defined earnings before interest, income
taxes, depreciation and amortization targets. As amended, the more
significant covenants include compliance with certain pre-defined capital
expenditures. For all periods presented, the Company was in compliance with
this and all other covenants. This credit agreement provides for a
performance-pricing structured interest charge, ranging up to LIBOR plus
1.75% (4.00% at March 31, 2004), which is based on excess availability
levels. As of March 31, 2004 and December 31, 2003, the Company had
$6,904,000 and $0, respectively, outstanding under the Amended Credit
Agreement. Additionally, the Company had $799,000 and $966,000,
respectively, of letters of credit outstanding as of March 31, 2004 and
December 31, 2003. The letters of credit expire through December 31, 2004.
Long-term Borrowings
--------------------
In addition to the Amended Credit Agreement of the Company, TWC
entered into a separate $17,500,000 three-year revolving credit facility
with Wells Fargo Retail Finance on March 3, 2004. The line is secured by
substantially all assets of TWC and requires daily, weekly and monthly
financial reporting as well as compliance with financial, affirmative and
negative covenants. The most significant of these financial covenants is
compliance with certain pre-defined earnings before interest and
depreciation, accounts payable to inventory ratio covenant and capital
expenditures. For all periods presented, TWC was in compliance with this
and all other covenants. This credit agreement provides for a
performance-pricing structured interest charge, ranging up to LIBOR plus
2.75% (4.25% at March 31, 2004), which is based on excess availability
levels. As of March 31, 2004, TWC had approximately $488,000 outstanding
under this credit agreement and $413,000 of outstanding letters of credit.
The letters of credit expire through December 31, 2004.
In March 2004, in conjunction with the acquisition of The Walking
Company, the Company also entered into a $3 million two-year unsecured
revolving promissory note facility with Israel Discount Bank ("IDB"). This
facility bears interest at IDB prime plus 1% (5.00% at March 31, 2004) and
is personally guarantied by the Chairman of the Company, for which he
received a 2.5% guarantee fee of $75,000. At March 31, 2004, the Company
had $1,456,000 outstanding under this facility.
Redeemable Convertible Notes
----------------------------
In conjunction with the acquisition, the Company assumed
$3,279,000 of secured promissory notes and $700,000 and $21,000 of
unsecured promissory notes, respectively, payable to certain former
creditors of The Walking Company. The secured notes are secured by a lien
against substantially all the assets of TWC that is subordinated to the
Wells Fargo line of credit. The secured promissory notes bear interest at
7%, payable quarterly, and principal is due in equal annual payments of
$550,000 at the end of years two through five, with the balance of
$1,079,000 due on March 3, 2010. The secured note holders were also granted
rights to convert the notes into a total of 753,793 shares of common stock
of the Company at a conversion price of $4.35 per share through June 30,
2004. In addition, the holders of the secured notes received a right to
sell ("put") 50% of the outstanding principal amount of such notes to the
Company at a 20% discount through June 30, 2004 (the "note put rights").
For purposes of these financial statements, the estimated fair value of
these notes at the acquisition date was $3,694,000, and the notes were
recorded at this amount in the preliminary purchase price allocation. Such
notes are included in redeemable convertible notes in the accompanying
consolidated balance sheet.
The $700,000 unsecured promissory notes bear interest at 7%,
payable quarterly, with annual principal payments of $100,000 due at the
end of years two and three and $150,000 at the end of year four, with the
remaining balance of $350,000 due March 2, 2009. The $21,000 unsecured
notes bear the same terms, except all principal is due March 2, 2010. The
unsecured note holders also were granted rights to convert the notes into a
total of 165,748 shares of common stock of the Company at a conversion
price of $4.35 per share through June 30, 2004. In addition, the holders of
such unsecured notes received note put rights to put 100% of the
outstanding principal amount of such notes to the Company at a 20% discount
through June 30, 2004. The estimated fair value of these notes at the
acquisition date was $576,800, and these notes were recorded at this amount
in the preliminary purchase price allocation. Such notes are included in
redeemable convertible notes in the accompanying consolidated balance
sheet.
In order to facilitate the acquisition, the Chairman of the Board
and the Chief Executive Officer of the Company each personally guarantied
the potential obligation of the secured and unsecured note put rights and
another $2,800,000 of other potential obligations in regard to certain
administrative claims. In connection therewith, the Chairman and CEO were
given the right to purchase the secured and unsecured put rights if such
put rights were exercised. The Chairman and the CEO then assigned part of
their right to purchase such rights to certain executive officers and
individuals (the "Assigned Group"). In March 2004, the holders of the
$721,000 of unsecured notes exercised the right to put such notes, which
the Assigned Group purchased for $576,000. The Company recorded $328,000 as
compensation expense, which was equal to the difference between the market
value of the Company common stock into which such notes were convertible
and the amount at which the Assigned Group had the right to purchase such
notes. This amount is included in general and administrative expenses in
the accompanying statements of operations.
Note Payable
------------
As part of the acquisition of The Walking Company, TWC assumed
priority tax claims totaling approximately $584,000. The Bankruptcy Code
requires that each holder of a priority tax claims will be paid in full
with interest at the rate of six percent per year with annual payments for
a period of six years. At March 31, 2004, $97,000 of the priority tax claim
note has been classified as current and is included in short-term
borrowings in the accompanying consolidated balance sheet.
NOTE 4. Accounting for Stock-based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation, requires companies to estimate
employee stock compensation expense based on the fair value method of
accounting. However, the statement allows the alternative of continued use
of the intrinsic value method described in Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, if pro
forma disclosure of fair value amounts is provided. The Company has elected
the alternative of continued use of APB Opinion No. 25.
The following table illustrates the effect on net income and earnings
per share as if the fair value based method had been applied to all outstanding
and unvested stock option awards in each period presented:
Three Months Ended
------------------
March 31,
--------
2004 2003
---- ----
Net loss:
As reported...................................... $ (2,996,000) $ (2,750,000)
Add: Stock-based employee compensation expense
included in reported net loss, net of related tax
effects........................................ 114,000 ---
Deduct: Total stock-based employee compensation
expense determined under fair value method, net
of related tax effects......................... (837,000) (163,000)
--------- ---------
Pro forma........................................ $ (3,719,000) $(2,913,000)
============= ============
Net loss per share:
As reported:
Basic and diluted................................ $ (0.36) $ (0.33)
Pro forma:
Basic and diluted................................ $ (0.45) $ (0.35)
Antidilutive options.............................. 668,000 1,678,000
NOTE 5. Stockholder's Equity
In March 1998, the Company announced that its Board authorized the
repurchase of up to $10,000,000 of its common stock. As of March 31, 2004, the
Company had repurchased 1,455,152 shares totaling $7,854,000.
In conjunction with the acquisition, the Company issued to certain
former creditors of The Walking Company 10%(10,000 shares)of the outstanding
common stock of TWC, the subsidiary of the Company that acquired such assets
(the "minority interest"). The holders of the minority interest were also
provided the right to sell ("put") such shares to TWC for cash totaling $645,000
through June 30, 2004 (the "stock put rights"). Additionally, these holders
received the right to instead convert the minority interest into 148,276 shares
of common stock of the Company at a price of $4.35 per share through June 30,
2004 (the "stock rights"). On April 23, 2004, TWC was merged into a wholly owned
subsidiary of the Company also called "The Walking Company" or "TWC." As a
result, the post-merger TWC is now a wholly owned subsidiary of the Company and
the holders of the TWC shares comprising the minority interest (excluding those
who had already converted their TWC shares into shares of the Company) are
entitled to receive $64.50 per share in cash (the "Merger Consideration"). The
minority interest shall no longer be outstanding and shall automatically be
cancelled and retired and each holder of such shares shall cease to have any
rights with respect thereto, except the right to receive the Merger
Consideration. The holders of the minority interest continue to have the right
to exercise the stock rights through June 30, 2004 by applying the cash proceeds
from TWC shares to the purchase of shares of common stock of the Company at
$4.35 per share. Based on the terms of such securities and as a result of the
post-period merger, the related obligations and stock rights have been recorded
as redeemable convertible notes in the accompanying consolidated balance sheet.
The estimated fair value of such securities at the date of the acquisition was
$727,000 and such securities were recorded at this amount in the preliminary
purchase price allocation.
NOTE 6. Segment Information
Since The Walking Company acquisition on March 3, 2004, the Company has
operated its business under two reportable segments: (i) Big Dog Sportswear
business, and (ii) The Walking Company business.
The Big Dog Sportswear business includes the Company's 191 Big Dog
retail stores (primarily located in outlet malls), wholesale and corporate
sales, and its catalog and internet business.
The Walking Company business includes the Company's 72 Walking Company
stores located primarily in leading retail malls.
The accounting policies of the reportable segments are consistent with
the consolidated financial statements of the Company. The Company evaluates
individual store profitability in terms of a store's contribution which is
defined as gross margin less direct selling, occupancy, and certain indirect
selling costs. Below are the results of operations on a segment basis for the
three months ended March 31, 2004 (with The Walking Company's results being
reported only for the period from the March 3, 2004 acquisition date):
For the Three Months Ended March 31, 2004
------------------------------------------
Big Dog The Walking Total
------- ----------- -----
Sportswear Company
---------- -------
Statement of Income:
Sales $16,626,000 $5,254,000 $21,880,000
Gross margin 8,736,000 2,485,000 11,221,000
Selling, marketing
and distribution 11,461,000 2,671,000 14,132,000
General and administrative. 1,327,000 470,000 1,797,000
--------- --------- -----------
Loss from Operations (4,052,000) (656,000) (4,708,000)
Interest expense 71,000 53,000 124,000
Benefit for income taxes (1,567,000) (269,000) (1,836,000)
----------- --------- -----------
Net loss $(2,556,000) $(440,000) $(2,996,000)
============ ========== ============
Balance Sheet:
Total Assets $37,835,000 $21,842,000 $59,677,000
Total Liabilities 15,937,000 12,506,000 28,443,000
NOTE 7. Recently Issued Accounting Standards
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The adoption of this statement did not have an impact on the Company's
consolidated financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities - an Interpretation of ARB No. 51, Consolidated Financial
Statements." This interpretation addresses consolidation by business enterprises
of entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. Variable interest entities are required to be
consolidated by their primary beneficiaries if they do not effectively disperse
risks among the parties involved. The primary beneficiary of a variable interest
entity is the party that absorbs a majority of the entity's expected losses or
receives a majority of its expected residual returns. In December 2003, the FASB
amended FIN 46, now known as FIN 46 Revised ("FIN 46R"). The requirements of FIN
46R are effective no later than the end of the first reporting period that ends
after March 15, 2004. A company that has applied FIN 46 to an entity prior to
the effective date of FIN 46R shall either continue to apply FIN 46 until the
effective date of FIN 46R or apply FIN 46R at an earlier date. The adoption of
this interpretation during the fiscal quarter ended March 31, 2004 did not have
an impact on the Company's consolidated financial statements.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis should be read in conjunction
with the Company's financial statements and notes related thereto. Certain
minor differences in the amounts below result from rounding of the amounts
shown in the consolidated financial statements.
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of federal securities laws, which are intended to be covered
by the safe harbors created thereby. Those statements include, but may not be
limited to, the discussions of the Company's operating and growth strategy.
Investors are cautioned that all forward-looking statements involve risks and
uncertainties including, without limitation, those set forth under the caption
"risk factors" in the business section of the Company's annual report on Form
10-K for the year ended December 31, 2003. Although the Company believes that
the assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could prove to be inaccurate, and therefore,
there can be no assurance that the forward-looking statements included in this
quarterly report on Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the company will be achieved. The Company undertakes no obligation to
publicly release any revisions to any forward-looking statements contained
herein to reflect events and circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with the
Company's unaudited financial statements and notes thereto included elsewhere in
this quarterly report on form 10-Q, and the annual audited financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2003 filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003
NET SALES. Net sales consist of sales from the Company's stores,
catalog, internet website, and wholesale accounts, all net of returns and
allowances. Net sales increased to $21.9 million for the three months ended
March 31, 2004 from $15.4 million for the same period in 2003, an increase of
$6.5 million, or 42.2%. The increase was primarily related to the following:
$5.3 million was attributable to The Walking Company stores sales since March 3,
2004 and $1.3 million is attributable to an increase in comparable store sales
of 9.2%. The increase was offset by $0.1 million attributable to a decrease in
sales for stores not yet qualifying as comparable stores, which includes the
closure of unprofitable stores netted against new stores opened in the period.
The increase in comparable store sales is primarily related to an overall
increase in consumer traffic in our stores and outlet locations.
GROSS PROFIT. Gross profit increased to $11.2 million for the three
months ended March 31, 2004 from $8.1 million for the same period in 2003, an
increase of $3.1 million, or 38.3%. As a percentage of net sales, gross profit
decreased to 51.3% in the three months ended March 31, 2004 from 52.8% for the
same period in 2003. The decrease was attributable to the addition of The
Walking Company store sales as of the acquisition date of March 3, 2004.
Such decrease in margin is expected to continue for future periods, as The
Walking Company margin contribution is generally lower than the Company's
historical results. The Walking Company gross margin was 47.3% for the period
ended March 31, 2004 as compared to Big Dogs' contribution of 52.6% (which is
consistent with Big Dogs' gross margin of 52.8% in the same fiscal 2003
period). Gross profit may not be comparable to those of other retailers, since
some retailers include distribution costs and store occupancy costs in costs of
goods sold, while we exclude them from gross margin, including them instead in
selling, marketing and distribution expenses.
SELLING, MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and
distribution expenses consist of expenses associated with creating, distributing
and selling products through all channels of distribution, including occupancy,
payroll and catalog costs. Selling, marketing and distribution expenses
increased to $14.1 million in the three months ended March 31, 2004 from $11.3
million for the same period for 2003, an increase of $2.8 million, or 24.8%. The
$2.8 million increase is primarily due to $2.7 million related to The Walking
Company. As a percentage of net sales, these expenses decreased to 64.6% in the
three months ended March 31, 2004 from 73.7% in the same period in 2003, a
decrease of 9.1%. The decrease as a percentage of sales is primarily related to
spreading expenses over a larger revenue base in addition to synergies created
as a result of the acquisition of The Walking Company. Due to the acquisition,
this decrease in expenses as a percentage of revenue is expected to continue in
future periods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses consist of administrative salaries, corporate occupancy costs and
other corporate expenses. General and administrative expenses increased to $1.8
million for the three months ended March 31, 2004 from $1.2 million for the
same period in 2003. The increase is directly attributable to The Walking
Company acquisition and the recording of $.3 of compensation expense. As a
percentage of net sales, these expenses increased to 8.2% in the three months
ended March 31, 2004 from 7.8% for the same period in 2003.
INTEREST EXPENSE. Interest expense remained constant at $0.1 million
for the three months ended March 31, 2004 and 2003. There was a slight increase
in interest expense due to additional borrowings. Such increase in interest
expense is expected to increase in future periods as a result of The Walking
Company acquisition.
INCOME TAXES. The Company recorded an income tax benefit at its
historical effective income tax rate of 38.0%. The Company believes it will
fully realize this benefit due to projected seasonal net income in the third and
fourth quarters as discussed in "Seasonality" below.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2004, the Company's primary uses of cash
were for the acquisition of The Walking Company, merchandise inventories, income
tax payments, and general operating activity. The Company satisfied its cash
requirements from existing cash balances, short-term borrowings under its line
of credit agreements and other borrowings.
Cash used in operating activities was $8.7 million and $7.5 million
for the three months ended March 31, 2004 and 2003, respectively. The increase
in cash used in operating activities is principally due to an increase in the
net loss for the period, operating cash requirements, and income taxes.
Cash used in investing activities was $1.8 million and $0.2 million for
the three months March 31, 2004 and 2003, respectively. Of the cash used in
investing activities in 2004, $1.6 million relates to the acquisition of the
Walking Company.
Cash provided by financing activities was $1.2 million in the three
months ended March 31, 2004 compared to $2.6 million in the same period in 2003.
In the three months ended March 31, 2004 and 2003, the Company had net
borrowings of $1.2 million and $2.6 million, respectively, under its borrowing
agreement.
In October 2001, the Company entered into a credit facility with Wells
Fargo Retail Finance, which was most recently amended in April 2004 (the
"Amended Credit Agreement"). The Amended Credit agreement, which expires in
March 2007, provides for a total commitment of $28,000,000 with the ability for
the Company to issue documentary and standby letters of credit of up to $3
million. The Company's ability to borrow under the facility is determined using
an availability formula based on eligible assets. The facility is collateralized
by substantially all of the Company's assets and requires daily, weekly and
monthly financial reporting as well as compliance with financial, affirmative
and negative covenants. Prior to the amendment, the most significant of these
financial covenants was compliance with certain per-defined earnings before
interest, income taxes, depreciation and amortization targets. As amended, the
most significant covenant is compliance with certain pre-defined capital
expenditures. For all periods presented, we were in compliance with this and all
other covenants. This credit agreement provides for a performance-pricing
structured interest charge, ranging up to LIBOR plus 1.75% (4% at March 31,
2004), which is based on excess availability levels. As of March 31, 2004 and
December 31, 2003, the Company had $6,904,000 and $0, respectively, outstanding
under this credit agreement. Additionally, the Company had $799,000 and
$966,000, of letters of credit outstanding as of March 31, 2004 and December 31,
2003, respectively. The letters of credit expire through December 15, 2004.
In addition to such line of credit of the Company, TWC entered into a
new three year $17,500,000 revolving credit facility with Wells Fargo Retail
Finance on March 3, 2004. The line is secured by substantially all of TWC assets
and requires daily, weekly and monthly financial reporting as well as compliance
with financial, affirmative and negative covenants. The most significant of
these covenants is compliance with certain pre-defined earnings before interest
and depreciation, accounts payable to inventory ratio covenant and capital
expenditures. For all periods presented, we were in compliance with this and all
other covenants. This credit agreement provides for a performance-pricing
structured interest charge, ranging up to LIBOR plus 2.75% (4.25% at March 31,
2004), which is based on excess availability levels. As of March 31, 2004, TWC
had approximately $488,000 outstanding under this credit agreement which is
expected to be repaid after a one-year period and $413,000 of outstanding
letters of credit. The letters of credit expire through December 15, 2004.
In March 2004, and in conjunction with the acquisition of The Walking
Company, the Company also entered into a $3 million two-year unsecured revolving
promissory note facility with Israel Discount Bank. The revolving facility bears
interest at prime plus 1% and is guaranteed by the Chairman of the Company for
which he received a 2.5% guarantee fee of $75,000. At March 31, 2004, the
Company had $1,456,000 outstanding under this facility which is expected to be
repaid after a one-year period.
In conjunction with the acquisition, the Company assumed $3,279,000 of
secured promissory notes and $700,000 and $21,000 of unsecured promissory notes,
respectively, payable to certain former creditors of The Walking Company. The
secured note holders are secured by a lien against substantially all the assets
of TWC that is subordinated to the Wells Fargo line of credit. The secured
promissory notes bear interest at 7%, payable quarterly, and principal is
payable in equal annual payments of $550,000 at the end of years two through
five and the remaining principal balance of $1,079,000 is due on March 3, 2010.
The secured note holders were also granted the right to convert the notes into a
total of 753,793 shares of common stock of the Company at a conversion price of
$4.35 per share through June 30, 2004. In addition, the holders of the secured
notes received a right to sell ("put") 50% of the outstanding principal amount
of such notes to the Company at a 20% discount through June 30, 2004. The
estimated fair value of the notes at the date of the acquisition was $3,694,000,
and the notes were recorded at this amount in the preliminary purchase price
allocation. Such notes are included in redeemable convertible notes in the
accompanying consolidated balance sheet.
The $700,000 unsecured promissory notes bear interest at 7%, payable
quarterly, with annual principal payments of $100,000 due at the end of years
two and three and $150,000 at the end of year four, with the remaining balance
of $350,000 due March 2, 2009. The $21,000 unsecured notes bear the same terms,
except all principal is due March 2, 2010. The unsecured note holders also were
granted rights to convert the notes into a total of 165,748 shares of common
stock of the Company at a conversion price of $4.35 per share through June 30,
2004. In addition, the holders of such unsecured notes received note put rights
to put 100% of the outstanding principal amount of such notes to the Company at
a 20% discount through June 30, 2004. The estimated fair value of these notes at
the acquisition date was $576,800, and these notes were recorded at this amount
in the preliminary purchase price allocation. Such notes are included in
redeemable convertible notes in the accompanying consolidated balance sheet.
In order to facilitate the acquisition, the Chairman of the Board and
the Chief Executive Officer of the Company each personally guarantied the
potential obligation of the secured and unsecured note put rights and another
$2,800,000 of other potential obligations in regard to certain administrative
claims. In connection therewith, the Chairman and CEO were given the right to
purchase the secured and unsecured notes, if the note put rights were exercised.
The Chairman and the CEO then assigned part of their right to purchase such
rights to certain executive officers and individuals (the "Assigned Group"). In
March 2004, the holders of the $721,000 of unsecured notes exercised the right
to put such notes, which the Assigned Group purchased for $576,000. The Company
recorded $328,000 as compensation expense, which was equal to the difference
between the market value of the Company common stock into which such notes were
convertible and the amount at which the Assigned Group had the right to purchase
such notes. This amount is included in general and administrative expenses in
the accompanying statements of operations.
As part of the acquisition of The Walking Company, TWC assumed priority
tax claims totaling approximately $584,000. The Bankruptcy Code requires that
each holder of a priority tax claims will be paid in full with interest at the
rate of six percent per year with annual payments for a period of six years. At
March 31, 2004, $97,000 of the priority tax claim note has been classified as
current and is included in short-term borrowings in the accompanying
consolidated balance sheet.
The Company has made no changes to its critical accounting policies as
disclosed in the Annual Report on Form 10-K for the year ended December 31,
2002.
COMMITMENTS AND OBLIGATIONS
As of March 31, 2004, we had the following obligations, net of
interest:
Amounts of Commitment Expiration per Period
-------------------------------------------
Total Amounts Less than 1
--------- -------
Committed year 1 to 3 years 4 to 5 years Over 5 years
--------- --------- ------------ ------------ ------------
Debt:
Revolving lines of credit..... $ 8,848,000 $ 6,904,000 $ 1,944,000 $ --- $ ---
Redeemable convertible notes.. 4,992,000 4,992,000 --- --- ---
Priority tax claims........... 584,000 97,000 97,000 97,000 293,000
Contractual Obligations:
Operating leases.............. 86,128,000 23,263,000 45,636,000 12,087,000 5,142,000
Capital leases................ 206,000 67,000 139,000 --- ---
Other Commercial Commitments:
Letters of credit............. 847,000 847,000 --- --- ---
Standby letters of credit..... 365,000 365,000 --- --- ---
----------- ------------ ----------- ----------- ------------
Total Commitments............... $101,970,000 $ 36,535,000 $47,816,000 $12,184,000 $ 5,435,000
------------ ------------ ----------- ----------- ------------
SEASONALITY
The Company believes its seasonality is somewhat different than many
apparel retailers since a significant number of the Company's stores are located
in tourist areas and outdoor malls that have different visitation patterns than
urban and suburban retail centers. The third and fourth quarters (consisting of
the summer vacation, back-to-school and Christmas seasons) have historically
accounted for the largest percentage of the Company's annual sales and profits.
The Company has historically incurred operating losses in its first quarter and
may be expected to do so in the foreseeable future.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe it has material exposure to losses from
market-rate sensitive instruments. The Company has not invested in derivative
financial instruments. In the normal course of business, the financial position
and results of operations of the Company are subject to market risk associated
with interest rate movements on borrowings. The Company's credit facilities
contain a performance-pricing structured-interest charge, ranging up to LIBOR
plus 2.75% based on excess availability levels. The Company's market risk on
interest rate movements will increase based on higher borrowing levels. See
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations-Liquidity and Capital Resources."
ITEM 4:
CONTROLS AND PROCEDURES
At March 31, 2004, the Company completed an evaluation, under the
supervision and with the participation of the Company's chief executive officer
and chief financial officer of the effectiveness of the Company's disclosure
controls and procedures. Based on this evaluation, the Company's chief executive
officer and chief financial officer concluded that the Company's disclosure
controls and procedures were effective in making known to them all material
information required to be disclosed in this report as it related to the Company
and its subsidiaries. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect the
internal controls subsequent to the date the Company completed this evaluation.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is involved from time to time in litigation
incidental to its business. The Company believes that the
outcome of such litigation will not have a material adverse
effect on its operation or financial condition.
ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND
ISSUER PURCHASES OF EQUITY SECURITIES
In connection with the March 3, 2004 acquisition of the assets
of The Walking Company, former creditors of The Walking
Company shares of common stock of TWC, received rights to
convert certain promissory note issued by TWC into common
stock of the Company, and rights to convert such TWC stock
into shares of common stock of the Company. See ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES,
above. Such securities were issued without registration under
the Securities Act of 1933 pursuant the exemption under
Section 1145(a) of the federal Bankruptcy Code.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5: OTHER INFORMATION
Not applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
32.1 Certification pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
( b) Reports on Form 8-K
On March 18, 2004, the Company filed a current report on
Form 8-K to report the acquisition of The Walking Company
on March 3, 2004
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIG DOG HOLDINGS, INC.
May 20, 2004 /s/ ANDREW D. FESHBACH
----------------------
Andrew D. Feshbach
President and Chief Executive Officer
(Principal Executive Officer)
May 20, 2004 /s/ ROBERTA J. MORRIS
---------------------
Roberta J. Morris
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Chief Executive Officer Certification
I, Andrew D. Feshbach, President and Chief Executive Officer of Big Dog
Holdings, Inc., certify that:
1. I have reviewed this report on Form 10-Q of Big Dog Holdings, Inc.,
(the "Registrant");
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15 and 15d-15e) for the Registrant and have:
a. designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our supervision
to ensure that material information relating to the Registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this b report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c. disclosed in this report any change in the Registrant's internal control
over financial reporting that occurred during the Registrant's most
recent fiscal quarter (the Registrant fourth quarter in the case of
an annual report) that has materially affected, or is reasonably likely
to materially affect, the Registrant's internal control over financial
reporting; and
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of Registrant's board of
directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or
operation of internal controls over a financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls over financial reporting.
Dated: May 20, 2004
By /s/ANDREW D. FESHBACH
----------------------------
Andrew D. Feshbach
Chief Executive Officer and President
Chief Financial Officer Certification
I, Roberta J. Morris, Chief Financial Officer of Big Dog Holdings, Inc.,
certify that:
1. I have reviewed this report on Form 10-Q of Big Dog Holdings, Inc., (the
"Registrant");
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15 and 15d-15e) for the Registrant and have:
a. designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our supervision
to ensure that material information relating to the Registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this b report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c. disclosed in this report any change in the Registrant's internal control
over financial reporting that occurred during the Registrant's most
recent fiscal quarter (the Registrant fourth quarter in the case of
an annual report) that has materially affected, or is reasonably likely
to materially affect, the Registrant's internal control over financial
reporting; and
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of Registrant's board of
directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or
operation of internal controls over a financial reporting which are
reasonably likely to adversely affect the Registrant's ability to record,
process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls over financial reporting.
Dated: May 20, 2004
By /s/ROBERTA J. MORRIS
----------------------------
Roberta J. Morris
Chief Financial Officer