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 June 30, 2005
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.
Yes X 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 August 1, 2005 was 9,189,932 shares.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
NO.
----
PART 1. FINANCIAL INFORMATION (Unaudited)............................. 3
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
June 30, 2005 (Unaudited) and December 31, 2004.............. 3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six months ended June 30, 2005 and 2004....................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30, 2005 and 2004....................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................... 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 15
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 21
ITEM 4: CONTROLS AND PROCEDURES...................................... 22
PART II: OTHER INFORMATION............................................ 22
ITEM 1: LEGAL PROCEEDINGS............................................ 22
ITEM 2: CHANGES IN SECURITIES,USE OF PROCEEDS AND ISSUER
PURCHASE OF EQUITY SECURITIES................................ 22
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.............................. 23
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 23
ITEM 5: OTHER INFORMATION............................................ 23
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K............................. 23
SIGNATURES..................................................................... 25
PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2005 2004
---------------------- ----------------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 594,000 $ 4,670,000
Receivables, net 767,000 411,000
Inventories, net 44,407,000 39,581,000
Prepaid expenses and other current assets 1,965,000 928,000
Deferred income taxes 1,855,000 1,691,000
---------------------- ----------------------
Total current assets 49,588,000 47,281,000
PROPERTY AND EQUIPMENT, Net 9,988,000 9,956,000
INTANGIBLE ASSETS, Net 172,000 172,000
DEFERRED INCOME TAXES 1,690,000 1,042,000
OTHER ASSETS 309,000 380,000
---------------------- ----------------------
TOTAL $ 61,747,000 $ 58,831,000
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 7,384,000 $ 304,000
Current portion of long-term debt 246,000 243,000
Accounts payable 5,006,000 5,033,000
Income taxes payable 72,000 2,643,000
Accrued expenses and other current liabilities 5,376,000 6,331,000
---------------------- ----------------------
Total current liabilities 18,084,000 14,554,000
NOTES PAYABLE 109,000 289,000
CAPITAL LEASE OBLIGATIONS 152,000 256,000
DEFERRED RENT AND LEASE INCENTIVES 1,333,000 943,000
DEFERRED GAIN ON SALE-LEASEBACK 222,000 248,000
---------------------- ----------------------
Total liabilities 19,900,000 16,290,000
---------------------- ----------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 3,000,000 shares authorized,
none issued and outstanding - -
Common stock, $0.01 par value, 30,000,000 shares authorized,
10,736,522 and 10,709,030 issued at June 30, 2005 and
December 31, 2004, respectively 107,000 107,000
Additional paid-in capital 25,659,000 25,513,000
Retained earnings 24,445,000 25,149,000
Treasury stock, 1,549,498 and 1,529,998 at June 30, 2005 and
December 31, 2004, respectively (8,364,000) (8,228,000)
---------------------- ----------------------
Total stockholders' equity 41,847,000 42,541,000
---------------------- ----------------------
TOTAL $ 61,747,000 $ 58,831,000
====================== ======================
See notes to the consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------------------------- -------------------------------------------
2005 2004 2005 2004
-------------------- ------------------- -------------------- -------------------
NET SALES $43,441,000 $41,043,000 $74,786,000 $62,924,000
COST OF GOODS SOLD 18,761,000 18,013,000 33,879,000 28,672,000
-------------------- ------------------- -------------------- -------------------
GROSS PROFIT 24,680,000 23,030,000 40,907,000 34,252,000
-------------------- ------------------- -------------------- -------------------
OPERATING EXPENSES:
Selling, marketing and
distribution 19,327,000 18,875,000 37,594,000 33,008,000
General and administrative 2,286,000 1,936,000 4,029,000 3,733,000
-------------------- ------------------- -------------------- -------------------
Total operating expenses 21,613,000 20,811,000 41,623,000 36,741,000
-------------------- ------------------- -------------------- -------------------
INCOME (LOSS) FROM OPERATIONS 3,067,000 2,219,000 (716,000) (2,489,000)
OTHER INCOME - 82,000 - 82,000
INTEREST INCOME 1,000 64,000 41,000 70,000
INTEREST EXPENSE (297,000) (347,000) (448,000) (477,000)
-------------------- ------------------- -------------------- -------------------
INCOME (LOSS) BEFORE BENEFIT FOR
INCOME TAXES 2,771,000 2,018,000 (1,123,000) (2,814,000)
PROVISION (BENEFIT) FOR INCOME
TAXES 1,053,000 767,000 (427,000) (1,069,000)
-------------------- ------------------- -------------------- -------------------
NET INCOME (LOSS) $ 1,718,000 $ 1,251,000 $ (696,000) $(1,745,000)
==================== =================== ==================== ===================
NET INCOME (LOSS) PER SHARE:
BASIC $ 0.19 $ 0.15 $ (0.08) $ (0.21)
==================== =================== ==================== ===================
DILUTED $ 0.18 $ 0.14 $ (0.08) $ (0.21)
==================== =================== ==================== ===================
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC 9,187,000 8,261,000 9,183,000 8,252,000
==================== =================== ==================== ===================
DILUTED 9,760,000 8,907,000 9,183,000 8,252,000
==================== =================== ==================== ===================
See notes to the consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six months ended
June 30,
----------------------------------------------------
2005 2004
---------------------- ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(696,000) $(1,745,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,928,000 1,658,000
Compensation expense - 328,000
Gain on early extinguishment of notes payable - (82,000)
Amortization of premium on convertible notes - (25,000)
Amortization of deferred financing fees 70,000 106,000
Provision for losses on receivables 1,000 7,000
Loss on disposition of property and equipment 27,000 10,000
Deferred income taxes (812,000) (1,132,000)
Changes in operating assets and liabilities:
Receivables (357,000) (119,000)
Inventories (4,826,000) (4,147,000)
Prepaid expenses and other assets 60,000 1,307,000
Accounts payable (27,000) 1,330,000
Income taxes payable (2,570,000) (1,430,000)
Accrued expenses and other current liabilities (956,000) (3,289,000)
Deferred rent 390,000 84,000
Deferred gain on sale-leaseback (26,000) (27,000)
---------------------- -----------------------
Net cash used in operating activities (7,794,000) (7,166,000)
---------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,988,000) (688,000)
Prepaid acquisition costs (1,100,000) -
Proceeds from the sales of property and equipment 1,000 -
Acquisition of The Walking Company, net of cash acquired - (1,577,000)
Other (3,000) -
---------------------- -----------------------
Net cash used in investing activities (3,090,000) (2,265,000)
---------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement 7,080,000 862,000
Repurchase of common stock (137,000) -
Repayment of notes payable (190,000) -
Repayment of redeemable convertible notes and rights - (363,000)
Exercise of stock options 146,000 16,000
Repayment of capital lease obligations (91,000) (62,000)
---------------------- -----------------------
Net cash provided by financing activities 6,808,000 453,000
---------------------- -----------------------
NET DECREASE IN CASH (4,076,000) (8,978,000)
CASH, BEGINNING OF PERIOD 4,670,000 10,503,000
---------------------- -----------------------
CASH, END OF PERIOD $ 594,000 $1,525,000
====================== =======================
See notes to the consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six months ended
June 30,
---------------------------------------------
2005 2004
--------------------- --------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 300,000 $ 205,000
Income taxes $ 2,955,000 $ 1,493,000
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING ACTIVITIES:
ACQUISITION OF THE WALKING COMPANY:
Working capital, other than cash $ 17,000
Properties 7,142,000
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
=====================
REDEMPTION OF NOTES AND RIGHTS:
Redeemable convertible notes and rights assumed $ 4,998,000
Compensation expense 328,000
Accrued interest 75,000
Amortization of premium on convertible notes (25,000)
Gain on early extinguishment of debt (82,000)
Issuance of 993,146 shares of common stock (4,931,000)
Net cash effect due to redemption of notes and rights $ 363,000
=====================
OTHER:
Purchase of property under capital lease $ 367,000
=====================
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 accounting principles generally accepted 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 accounting
principles generally accepted in the United States of America for complete
financial statements.
The interim financial statements for the six months ended June 30, 2005
and 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 six month period ended June 30, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005. 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, 2004.
NOTE 2. Acquisitions
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. The Walking Company is a leading
independent specialty retailer of high quality, technically designed comfort
footwear 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 have been used by the
subsidiary to continue the business under the name "The Walking Company"
("TWC"). 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,
$5.0 million in issuance of notes and rights, $15.5 million of assumption of
accounts payable, accrued expenses and other liabilities (including acquisition
related costs of $1.3 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.
Cash and cash equivalents. $ 123,000
Inventories 12,754,000
Other current assets 1,944,000
Property, plant and equipment 7,320,000
------------
Total assets acquired $ 22,141,000
------------
Current and other liabilities $ 15,489,000
Notes payable and rights issued 4,952,000
Total liabilities assumed $ 20,441,000
------------
Net assets acquired over liabilities $ 1,700,000
============
The following table presents unaudited results of the combined
operations for the six months ended June 30, 2005 and 2004, respectively, with
the results of the period ending June 30, 2004 being presented on a pro forma
basis as if the acquisition had occurred as of the beginning of such period
rather than as of the acquisition date.
Six months ended
June 30,
-------------------------------------------------
2005 2004
--------------------- --------------------
Net sales $74,786,000 $ 71,242,000
Net loss (696,000) (2,296,000)
Net loss per common share:
Basic and diluted $ (0.08) $ (0.28)
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 at the beginning of the period specified.
FOOTWORKS ACQUISITION
On May 20, 2005, the Company entered into a definitive purchase
agreement to purchase the assets of Footworks, a division of a privately held
shoe retailer, for approximately $10 million dollars which will be funded by
cash and debt. The purchase includes a chain of 8 retail stores selling comfort
shoes and accessories. The Company had incurred $1.1 million of prepaid
acquisition costs as of June 30, 2005, of which $1.0 million is a refundable
escrow deposit. This acquisition is scheduled to close by August 31, 2005.
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 July 2005 (the "Amended
Credit Agreement"). Prior to the July 2005 amendment, the Amended Credit
Agreement provided 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 was determined using
an availability formula based on eligible assets. The facility was
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. The most significant of these financial
covenants was compliance with a pre-defined annual maximum capital expenditure
amount. For all periods presented, the Company was in compliance with all
covenants. This credit agreement provides for a performance-pricing structured
interest charge which was based on excess availability levels. The interest rate
ranged from the bank's base rate (6.25% at June 30, 2005) or a LIBOR loan rate
plus a margin ranging up to 1.75%. The Company had two LIBOR loans outstanding
on June 30, 2005 at interest rates of 4.68% and 4.77%. As of June 30, 2005 and
December 31, 2004, the Company had $3,554,000 and $0, respectively, outstanding
under the Amended Credit Agreement. Additionally, the Company had $208,000 and
$899,000, respectively, of letters of credit outstanding as of June 30, 2005 and
December 31, 2004. The letters of credit expire through August 2005.
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, which was recently amended as of July
2005. Prior to the July 2005 amendment, this line was secured by substantially
all assets of TWC and required daily, weekly and monthly financial reporting as
well as compliance with financial, affirmative and negative covenants. The most
significant of these financial covenants was compliance with a maximum annual
capital expenditure amount. For all periods presented, TWC was in compliance
with all covenants. This credit agreement provided for a performance-pricing
structured interest charge which was based on excess availability levels. The
interest rate was either the Bank's base rate (6.25% at June 30, 2005) or a
LIBOR loan rate plus a margin which ranges up to 2.75% (5.52% at June 30, 2005).
At June 30, 2005 and December 31, 2004, TWC had approximately $3,831,000 and
$304,000, respectively outstanding under this credit agreement and $0 and
$341,000, respectively of outstanding letters of credit.
In July 2005, the Company combined both credit facilities discussed
above and entered into a $47,000,000 revolving credit facility with Wells Fargo
Retail Finance. The line is secured by substantially all assets of Big Dog USA,
Inc. and TWC and requires daily, weekly and monthly financial reporting as well
as compliance with financial, affirmative and negative covenants. This credit
agreement provides for a performance-pricing structured interest charge which is
based on excess availability levels. The interest rate ranges from the bank's
base rate or a LIBOR loan plus a margin ranging up to 1.75%. The most
significant of these financial covenants is compliance with a capital
expenditures covenant which limits the Company to $4,000,000 expenditures for
2005 (amount is adjusted annually based on an annual business plan). The Amended
Credit Agreement expires in October 2009. Additionally, simultaneously with the
closing of the Company's acquisition described in Note 2, the Bank will issue a
$2,000,000 letter of credit and a $3,000,000 term loan facility, amortizable
over 4 and a half years, payable monthly. The term loan interest charge will be
set at prime plus .5% or LIBOR plus 2.75% and the term loan facility is due and
payable in October 2009.
Long-term Borrowings
In March 2004, in conjunction with the 2004 acquisition of The Walking
Company, the Company also entered into a $3,000,000 two-year unsecured revolving
promissory note facility with Israel Discount Bank ("IDB"). This facility bore
interest at IDB prime plus 1% and was personally guarantied by the Chairman of
the Company, for which he received an annual 2.5% guarantee fee of $75,000.
There were no borrowings as of December 31, 2004. In February of 2005, this
facility was cancelled by the Company.
Redeemable Convertible Notes
In conjunction with the 2004 acquisition, the Company assumed
$3,279,000 of secured promissory notes and $721,000 of unsecured promissory
notes, respectively, payable to certain former creditors of TWC. 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"). 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.
In order to facilitate the 2004 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's 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.
During the second quarter of 2004, certain note holders and the
Assigned Group exercised their rights to convert $2,918,000 in secured notes,
$721,000 in unsecured notes and $64,000 in accrued interest into 851,117 shares
of common stock. As an inducement to cash out, the Company offered to redeem the
remaining secured notes at a 10% discount instead of the contractual 20%
discount. Accordingly, all of the remaining secured notes were redeemed for a
cash payment of 90% of the face value. As a result of the above transactions the
Company recognized a gain on the early extinguishment of debt of $82,000 which
was recorded as other income in the second quarter of 2004.
Litigation Contingency
In July, 2004, a lawsuit was filed against the Company by Big Dog
Motorcycles LLC ("BDM") in the Central District of California. The complaint
alleges, among other things, breach and wrongful termination of a trademark
license agreement. Among other things, BDM seeks $1,500,000 in liquidation
damages and attorneys fees. The Company has countersued for breach of contract
and trademark infringement. While the Company is diligently evaluating BDM's
claims and seeking additional information, it currently believes that BDM's
claims lack merit and intends to defend the lawsuit vigorously. At this stage of
the dispute, it is premature to assess what, if any, impact the lawsuit might
have on the Company's business, financial position, results of operations and
cash flows. As of June 30, 2005, the Company has recorded a legal accrual of
$250,000 to provide for its defense.
Notes Payable
As part of the acquisition of The Walking Company, TWC assumed priority
tax claims totaling approximately $627,000. The Bankruptcy Code requires that
each holder of a priority tax claim 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
June 30, 2005 and December 31, 2004, $62,000 and $72,000, respectively, of the
priority tax claim note is classified as current and is included in current
portion of long-term debt in the accompanying consolidated balance sheet. As of
June 30, 2005 and December 31, 2004, the remaining notes had a balance of
$109,000 and $289,000, respectively.
Note 4. Accounting for Stock-based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123(R),
"Share-Based Payment" amends SFAS No. 123, "Accounting for Stock-Based
Compensation", and APB Opinion No. 25, "Accounting for Stock Issued to
Employees". SFAS No.123(R) requires companies to estimate employee stock
compensation expense based on the fair value method of accounting and recognize
such expense in the financial statements. This statement was effective as of the
first interim period beginning after June 15, 2005. In March 2005, the SEC
announced it will permit companies to delay implementation until the beginning
of their next fiscal year beginning after June 15, 2005, instead of the next
reporting period beginning after June 15, 2005. Management has determined that
they will adopt SFAS No. 123(R) as of the beginning of their next fiscal year,
January 1, 2006. In the interim, the Company is continuing to use the intrinsic
value method in estimating employee stock compensation expense based on the fair
value method of accounting. This method is allowed under SFAS No. 148, which
amended SFAS No. 123 in December 2002, and proforma disclosure of fair value
amounts is provided.
The following table illustrates the effect on net income (loss) and net
income (loss) 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 Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2005 2004 2005 2004
---- ---- ---- ----
Net income (loss):
As reported $ 1,718,000 $ 1,251,000 $ (696,000) $(1,745,000)
Add:
Stock-based
employee compensation expense included
in reported net income (loss), net of
related tax effects.....................
--- 114,000 --- 114,000
Deduct: Total stock-based employee
compensation expense determined
under fair value method, net of
related tax effects................... (240,000) (207,000) (329,000) (346,000)
----------- ----------- ----------- -----------
Pro forma net income (loss)................. $ 1,478,000 $ 1,158,000 $(1,977,000) $(1,977,000)
=========== =========== =========== ===========
Net income (loss) per share:
As reported:
Basic.................................... $ 0.19 $ 0.15 $ (0.08) $ (0.21)
Diluted.................................. $ 0.18 $ 0.14 $ (0.08) $ (0.21)
Pro forma:
Basic.................................... $ 0.16 $ 0.14 $ (0.11) $ (0.24)
Diluted.................................. $ 0.15 $ 0.13 $ (0.11) $ (0.24)
Antidilutive options........................ 1,590,000 1,317,000 -- --
NOTE 5. Stockholders' 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 June 30, 2005, the
Company had repurchased 1,549,498 shares totaling $8,364,000. As of December 31,
2004, the Company had repurchased 1,529,998 shares totaling $8,228,000.
In conjunction with the 2004 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 and the former minority holders were entitled to
either a cash redemption or they could exercise their stock put rights. As of
September 30, 2004 $618,000 of the former minority interest had been converted
to 142,029 shares of common stock. The remaining $27,000 was redeemed for cash.
In addition, as discussed in Note 3, the Company issued 851,117 shares
related to the conversion of certain debt issued in conjunction with the
acquisition of The Walking Company.
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 181 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 77 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 and six months ended June 30, 2005 and 2004 (with The Walking Company's
results being reported only for the period from the March 3, 2004 acquisition
date):
Big Dog Sportswear The Walking Company Total
-------------------- -------------------- ---------------------
Three months ended June 30, 2005
Sales $ 21,973,000 $ 21,468,000 $ 43,441,000
Net Income $ 864,000 $ 854,000 $ 1,718,000
Total assets $ 35,886,000 $ 25,861,000 $ 61,747,000
Three months ended June 30, 2004
Sales $ 23,117,000 $ 17,926,000 $ 41,043,000
Net Income $ 709,000 $ 542,000 $ 1,251,000
Total assets $ 37,410,000 $ 21,399,000 $ 58,809,000
Six months ended June 30, 2005
Sales $ 36,742,000 $ 38,044,000 $ 74,786,000
Net (Loss) Income $ (1,100,000) $ 404,000 $ (696,000)
Total assets $ 35,886,000 $ 25,861,000 $ 61,747,000
Six months ended June 30, 2004
Sales $ 39,743,000 $ 23,181,000 $ 62,924,000
Net (Loss) Income $ (1,848,000) $ 103,000 $ (1,745,000)
Total assets $ 37,410,000 $ 21,399,000 $ 58,809,000
NOTE 7. Recently Issued Accounting Standards
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS
No. 151 amends the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) under the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing". Paragraph 5 of ARB No. 43, Chapter
4, previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this statement requires that allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not expect adoption
of SFAS No. 151 to have a material impact, if any, on the Company's financial
position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets," an amendment to Opinion No. 29, "Accounting for Nonmonetary
Transactions". SFAS No. 153 eliminates certain differences in the guidance in
Opinion No. 29 as compared to the guidance contained in standards issued by the
International Accounting Standards Board. The amendment to Opinion No. 29
eliminates the fair value exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Such an exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
nonmonetary asset exchanges occurring in periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in
periods beginning after December 16, 2004. Management does not expect adoption
of SFAS No. 153 to have a material impact, if any, on the Company's financial
position or results of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". SFAS 123(R) amends SFAS No. 123, "Accounting for Stock-Based
Compensation", and APB Opinion No. 25, "Accounting for Stock Issued to
Employees". SFAS No.123(R) requires that the cost of share-based payment
transactions (including those with employees and non-employees) be recognized in
the financial statements. SFAS No. 123(R) applies to all share-based payment
transactions in which an entity acquires goods or services by issuing (or
offering to issue) its shares, share options, or other equity instruments
(except for those held by an ESOP) or by incurring liabilities (1) in amounts
based (even in part) on the price of the company's shares or other equity
instruments, or (2) that require (or may require) settlement by the issuance of
a company's shares or other equity instruments. This statement is effective (1)
for public companies qualifying as SEC small business issuers, as of the first
interim period or fiscal year beginning after December 15, 2005, or (2) for all
other public companies, as of the first interim period or fiscal year beginning
after June 15, 2005, or (3) for all nonpublic entities, as of the first fiscal
year beginning after December 15, 2005. In March 2005, the SEC announced it will
permit companies to delay implementation until the beginning of their next
fiscal year, instead of the next reporting period. Management has determined
that they will adopt SFAS No. 123(R) as of the beginning of their next fiscal
year, and is currently assessing the impact of this statement on its financial
position and results of operations in 2006. In the interim, the Company is
continuing to use the intrinsic value method in estimating employee stock
compensation expense based on the fair value method of accounting. This method
is allowed under SFAS No. 148, which amended SFAS No. 123 in December 2002, and
proforma disclosure of fair value amounts is provided.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", that addresses accounting for changes in accounting principle,
changes in accounting estimates and changes required by an accounting
pronouncement in the instance that the pronouncement does not include specific
transition provisions and error correction. SFAS No. 154 requires retrospective
application to prior periods' financial statements of changes in accounting
principle and error correction unless impracticable to do so. SFAS No. 154
states an exception to retrospective application when a change in accounting
principle, or the method of applying it, may be inseparable from the effect of a
change in accounting estimate. When a change in principle is inseparable from a
change in estimate, such as depreciation, amortization or depletion, the change
to the financial statements is to be presented in a prospective manner. SFAS No.
154 and the required disclosures are effective for accounting changes and error
corrections in fiscal years beginning after December 15, 2005.
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 did not have any impact on our consolidated financial
statements.
In March 2005, the FASB issued FIN 47, "Accounting for Conditional
Asset Retirement Obligations - an Interpretation of FASB Statement No. 143,
Accounting for Asset Retirement Obligations." This interpretation addresses the
timing of liability recognition for legal obligations associated with the
retirement of a tangible long-lived asset when the timing and/or method of
settlement of the obligation are conditional on a future event. The
interpretation requires an entity to recognize a liability for the fair value of
a conditional asset retirement obligation when incurred if the liability's fair
value can be reasonably estimated. The adoption of this interpretation did not
have any impact on our 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 consolidated 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, 2004. 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, 2004 filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Factors Affecting Comparability
As previously explained, the Company acquired The Walking Company on March 3,
2004. As a result, period-to-period comparisons may not be meaningful. See Note
2 to the Consolidated Financial Statements.
Three Months Ended June 30, 2005 and 2004
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 $43.4 million for the three months ended June
30, 2005 from $41.0 million for the same period in 2004, an increase of $2.4
million, or 5.9%. The increase was primarily attributable to $3.1 million
related to an 18.3% increase in comparable store sales for TWC and $0.3 million
attributable to an increase in TWC sales for stores not yet qualifying as
comparable stores, which includes the closure of stores netted against new
stores opened in the period, a $0.1 million increase in the Company's TWC
catalog/Internet business and a $0.1 million increase in the Company's Big Dog
Sportswear catalog/Internet business. The increases were offset by $0.5 million
attributable to a 2.5% decrease in Big Dog Sportswear comparable store sales for
the period, $0.5 million attributable to a decrease in Big Dog Sportswear sales
for stores not yet qualifying as comparable stores, which includes the closure
of unprofitable stores netted against new stores opened in the period, and $0.2
million attributable to a decrease in the Company's Big Dog Sportswear wholesale
business. The increase in TWC comparable store sales is primarily related to
improved inventory levels and merchandise selection at the TWC stores since the
Company purchased TWC out of bankruptcy in March 2004. The decrease in Big Dog
Sportswear comparable store sales is primarily related to an overall decrease in
consumer traffic in our stores and outlet locations. The Company closed its
wholesale division in the second quarter of 2004.
GROSS PROFIT. Gross profit increased to $24.7 million for the three
months ended June 30, 2005 from $23.0 million for the same period in 2004, an
increase of $1.7 million, or 7.4%. As a percentage of net sales, gross profit
increased to 56.8% in the three months ended June 30, 2005 from 56.1% for the
same period in 2004. TWC's gross profit increased in the three months ended June
30, 2005 to 51.8% compared to 50.5% for 2004. The 1.3% increase was primarily
attributable to improved merchandise selection and pricing from TWC vendors. The
Big Dogs' gross profit increased to 61.7% in the three month period ended June
30, 2005 from 60.5% in the same period in 2004. The 1.2% increase was primarily
due to a shift from promotional sales to higher margined sales. 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 $19.3 million in the three months ended June 30, 2005 from $18.9
million for the same period in 2004, an increase of $0.4 million, or 2.1%. As a
percentage of net sales, selling, marketing and distribution expenses decreased
to 44.5% in the three months ended June 30, 2005 from 46.0% for the same period
in 2004. TWC's selling, marketing and distribution expenses decreased in the
three months ended June 30, 2005 to 39.5% compared to 41.4% for 2004. The 1.9%
decrease was attributable to spreading the expenses over a larger sales base.
The Big Dogs' selling, marketing and distribution expenses remained relatively
constant at 49.4% for the three month period ended June 30, 2005 and 49.6% in
the same period in 2004.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses consist of administrative salaries, corporate occupancy costs and other
corporate expenses. General and administrative expenses increased to $2.3
million for the three months ended June 30, 2005 from $1.9 million for the same
period in 2004. As a percentage of net sales, these expenses increased to 5.3%
in the three months ended June 30, 2005 from 4.7% for the same period in 2004.
Of the increase in general and administrative expenses, $0.2 million is related
to an accrual of anticipated legal fees related to pending litigation. See Part
II. ITEM 1: LEGAL PROCEEDINGS.
OTHER INCOME. Other income of $0.1 million in 2004 is the discount from
early debt extinguishment of the redeemable convertible notes related to The
Walking Company acquisition.
INTEREST INCOME. Interest income for the three month periods ended June
30, 2005 and 2004 was less than $0.1 million. Interest income is primarily
earned on excess cash balances invested on an overnight basis. As the Company
generally uses excess cash to reduce the outstanding balances on their lines of
credit, interest income in future periods is not expected to be significant.
INTEREST EXPENSE. Interest expense remained constant at $0.3 million
for the three month periods ended June 30, 2005 and 2004.
INCOME TAXES. The Company recorded income tax expense at its
historical effective income tax rate of 38.0%.
Six Months Ended June 30, 2005 and 2004
NET SALES. Net sales increased to $74.8 million for the six months
ended June 30, 2005 from $62.9 million for the same period in 2004, an increase
of $11.9 million, or 18.9%. The increase was primarily related to the
acquisition of TWC, which accounted for an increase in net sales of $10.6
million. In addition, an increase of $3.8 million was attributable to a 17.1%
increase in comparable store sales for TWC subsequent to the acquisition, $0.3
million attributable to an increase in TWC sales for stores not yet qualifying
as comparable stores, which includes the closure of stores netted against new
stores opened in the period, a $0.2 million increase in the Company's TWC
catalog/Internet business and a $0.1 million increase in the Company's Big Dog
Sportswear catalog/Internet business. The increases were offset by $1.3 million
attributable to a 3.8% decrease in Big Dog Sportswear comparable store sales for
the period, $1.1 million attributable to a decrease in Big Dog Sportswear sales
for stores not yet qualifying as comparable stores, which includes the closure
of unprofitable stores netted against new stores opened in the period, and $0.7
million attributable to a decrease in the Company's Big Dog Sportswear wholesale
business. The increase in TWC comparable store sales is primarily related to
improved inventory levels and merchandise selection at the TWC stores since the
Company purchased TWC out of bankruptcy in March 2004. The decrease in Big Dog
Sportswear comparable store sales is primarily related to an overall decrease in
consumer traffic in our stores and outlet locations. The Company closed its
wholesale division in the second quarter of 2004.
GROSS PROFIT. Gross profit increased to $40.9 million for the six
months ended June 30, 2005 from $34.3 million for the same period in 2004, an
increase of $6.6 million, or 19.2%. As a percentage of net sales, gross profit
increased to 54.7% in the six months ended June 30, 2005 from 54.4% for the same
period in 2004. TWC's gross profit increased in the six months ended June 30,
2005 to 51.4% compared to 49.8% for 2004. The 1.6% increase was primarily
attributable to improved merchandise selection and pricing from TWC vendors. The
Big Dogs' gross profit increased to 58.1% for the six month period ended June
30, 2005 compared to 57.1% for the same period in 2004. The 1.0% increase was
primarily due to a shift from promotional sales to higher margined sales. 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 increased to $37.6 million in the six months ended June
30, 2005 from $33.0 million for the same period in 2004, an increase of $4.6
million, or 13.9%. The $4.6 million increase is primarily related to the
acquisition of The Walking Company on March 3, 2004. As a percentage of net
sales, these expenses decreased to 50.3% in the six months ended June 30, 2005
from 52.5% in the same period in 2004, a decrease of 2.2%. The decrease is
primarily related to spreading the expenses over a larger sales base.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to $4.0 million for the six months ended June 30, 2005 from
$3.7 million for the same period in 2004. As a percentage of net sales, these
expenses decreased to 5.4% in the six months ended June 30, 2005 from 5.9% for
the same period in 2004. 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.
OTHER INCOME. Other income of $0.1 million in 2004 is the discount from
early debt extinguishment of the redeemable convertible notes related to The
Walking Company acquisition.
INTEREST INCOME. Interest income for the six month periods ended June
30, 2005 and 2004 was less than $0.1 million. Interest income is primarily
earned on excess cash balances invested on an overnight basis. As the Company
generally uses excess cash to reduce the outstanding balances on their lines of
credit, interest income in future periods is not expected to be significant.
INTEREST EXPENSE. Interest expense remained relatively constant for the
six month periods ended June 30, 2005 and 2004, decreasing to $0.4 million in
2005 from $0.5 million in 2004.
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 six months ended June 30, 2005, the Company's primary uses
of cash were for merchandise inventories, income tax payments, capital
expenditures 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 $7.8 million and $7.2 million for
the six months ended June 30, 2005 and 2004, respectively. The increase in cash
used in operating activities is principally due to an increase in income taxes
paid.
Cash used in investing activities was $3.1 million and $2.3 million for
the six months ended June 30, 2005 and 2004, respectively. Cash used in
investing activities in the first six months of 2005 primarily relates to $1.1
million in prepaid acquisition costs, 4 new TWC store openings, 2 new Big Dog
Sportswear store openings, retrofitting existing stores and corporate additions.
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 $6.8 million in the six
months ended June 30, 2005 compared to $0.5 million in the same period in 2004.
The increase is due to increased cash borrowings under the lines of credit.
In October 2001, the Company entered into a credit facility with Wells
Fargo Retail Finance, which was most recently amended in July 2005 (the "Amended
Credit Agreement"). Prior to the July 2005 amendment, the Amended Credit
Agreement provided 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 was determined using
an availability formula based on eligible assets. The facility was
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. The most significant of these financial
covenants was compliance with a pre-defined annual maximum capital expenditure
amount. For all periods presented, the Company was in compliance with all
covenants. This credit agreement provides for a performance-pricing structured
interest charge which was based on excess availability levels. The interest rate
ranged from the bank's base rate (6.25% at June 30, 2005) or a LIBOR loan rate
plus a margin ranging up to 1.75%. The Company had two LIBOR loans outstanding
on June 30, 2005 at interest rates of 4.68% and 4.77%. As of June 30, 2005 and
December 31, 2004, the Company had $3,554,000 and $0, respectively, outstanding
under the Amended Credit Agreement. Additionally, the Company had $208,000 and
$899,000, respectively, of letters of credit outstanding as of June 30, 2005 and
December 31, 2004. The letters of credit expire through August 2005.
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, which was recently amended as of July
2005. Prior to the July 2005 amendment, this line was secured by substantially
all assets of TWC and required daily, weekly and monthly financial reporting as
well as compliance with financial, affirmative and negative covenants. The most
significant of these financial covenants was compliance with a maximum annual
capital expenditure amount. For all periods presented, TWC was in compliance
with all covenants. This credit agreement provided for a performance-pricing
structured interest charge which was based on excess availability levels. The
interest rate was either the Bank's base rate (6.25% at June 30, 2005) or a
LIBOR loan rate plus a margin which ranges up to 2.75% (5.52% at June 30, 2005).
At June 30, 2005 and December 31, 2004, TWC had approximately $3,831,000 and
$304,000, respectively outstanding under this credit agreement and $0 and
$341,000, respectively of outstanding letters of credit.
In July 2005, the Company combined both credit facilities discussed
above and entered into a $47,000,000 revolving credit facility with Wells Fargo
Retail Finance. The line is secured by substantially all assets of Big Dog USA,
Inc. and TWC and requires daily, weekly and monthly financial reporting as well
as compliance with financial, affirmative and negative covenants. This credit
agreement provides for a performance-pricing structured interest charge which is
based on excess availability levels. The interest rate ranges from the bank's
base rate or a LIBOR loan plus a margin ranging up to 1.75%. The most
significant of these financial covenants is compliance with a capital
expenditures covenant which limits the Company to $4,000,000 expenditures for
2005 (amount is adjusted annually based on an annual business plan). The Amended
Credit Agreement expires in October 2009. Additionally, simultaneously with the
closing of the Company's acquisition described in Note 2, the Bank will issue a
$2,000,000 letter of credit and a $3,000,000 term loan facility, amortizable
over 4 and a half years, payable monthly. The term loan interest charge will be
set at prime plus .5% or LIBOR plus 2.75% and the term loan facility is due and
payable in October 2009.
In March 2004, in conjunction with the 2004 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 bore
interest at IDB prime plus 1% and was personally guarantied by the Chairman of
the Company, for which he received an annual 2.5% guarantee fee of $75,000. In
February of 2005, this facility was cancelled by the Company.
In conjunction with the 2004 acquisition, the Company assumed
$3,279,000 of secured promissory notes and $721,000 of unsecured promissory
notes, respectively, payable to certain former creditors of TWC. 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"). 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.
In order to facilitate the 2004 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's 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.
During the second quarter of 2004, certain note holders and the
Assigned Group exercised their rights to convert $2,918,000 in secured notes,
$721,000 in unsecured notes and $64,000 in accrued interest into 851,117 shares
of common stock. As an inducement to cash out, the Company offered to redeem the
remaining secured notes at a 10% discount instead of the contractual 20%
discount. Accordingly, all of the remaining secured notes were redeemed for a
cash payment of 90% of the face value. As a result of the above transactions the
Company recognized a gain on the early extinguishment of debt of $82,000 which
was recorded as other income in the second quarter of 2004.
As part of the acquisition of The Walking Company, TWC assumed priority
tax claims totaling approximately $627,000. The Bankruptcy Code requires that
each holder of a priority tax claim 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
June 30, 2005 and December 31, 2004, $62,000 and $72,000, respectively, of the
priority tax claim note is classified as current and is included in current
portion of long-term debt in the accompanying consolidated balance sheet. As of
June 30, 2005 and December 31, 2004, the remaining notes had a balance of
$109,000 and $289,000, respectively.
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,
2004.
COMMITMENTS AND OBLIGATIONS
As of June 30, 2005, we had the following obligations, net of interest:
Total Amounts Less than 1
Committed year 1 to 3 years 4 to 5 years Over 5 years
---------------- --------------- --------------- ---------------- ---------------
Debt:
Revolving lines of
credit $ 7,384,000 $7,384,000 $ - $ - $ -
Priority tax claims 171,000 62,000 83,000 26,000 -
Contractual Obligations:
Operating leases 87,885,000 23,170,000 34,248,000 18,349,000 12,118,000
Capital leases 336,000 184,000 152,000 - -
Other Commercial Commitments:
Letters of credit 208,000 208,000 - - -
---------------- --------------- --------------- ---------------- ----------------
Total Commitments $95,984,000 $31,008,000 $34,483,000 $18,375,000 $12,118,000
================ =============== =============== ================ ================
On May 20, 2005, the Company entered into a definitive agreement to
acquire the assets of Footworks, a division of a privately held shoe retailer,
for approximately $10.0 million. The acquisition is scheduled to close by August
31, 2005. During the second quarter, the Company made a $1.0 million escrow
payment, which is recorded as a deposit as of June 30, 2005. The remaining
purchase price of $9.0 million is considered an outstanding commitment. The
Company anticipates that this amount will be paid in the third quarter using
available cash and lines of credit.
SEASONALITY
The Company believes its seasonality is somewhat different than many
apparel retailers since a significant number of the Company's Big Dog Sportswear
stores are located in tourist areas and outdoor malls that have different
visitation patterns than urban and suburban retail centers. The Company believes
that the seasonality of The Walking Company stores will more closely resemble
traditional retailers. The third and fourth quarters (consisting of the summer
vacation, back-to-school and Christmas seasons) have historically accounted for
the largest percentage of the Company's annual sales and profits. The Company
has historically incurred operating losses in the first half of the year 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. Currently, the Company's credit
facilities contain a performance-pricing structured-interest charge, ranging up
to LIBOR plus 1.75% 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 June 30, 2005, 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
In July, 2004, a lawsuit was filed against the Company by Big
Dog Motorcycles LLC ("BDM") in the Central District of
California. The complaint alleges, among other things, breach
and wrongful termination of a trademark license agreement.
Among other things, BDM seeks $1.5 million in liquidation
damages and attorneys fees. The Company has countersued for
breach of contract and trademark infringement. While the
Company is diligently evaluating BDM's claims and seeking
additional information, it currently believes that BDM's
claims lack merit and intends to defend the lawsuit
vigorously. At this stage of the dispute, it is premature to
assess what, if any, impact the lawsuit might have on the
Company's business, financial position, results of operations
and cash flows. As of June 30, 2005, the Company has recorded
a legal accrual of $0.3 million to provide for its defense.
In addition, from time to time the Company is involved in
pending or threatened litigation incidental to its business.
The Company believes that the outcome of such litigation will
not have a material adverse impact on its operations or
financial condition.
ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES
OF EQUITY SECURITIES
In April, 2005 the Company repurchased 19,500 shares of its
common stock.
Total Number
of Shares
Purchased as Dollar Value
Part of that May Yet
Total Number Average Publicly be Purchased
of Shares Price Paid Announced Under the
Purchased per Share Plan Plan (1)
---------------- ------------- -------------- ---------------
4/1/2005 -
4/30/2005 19,500 $ 7.00 1,549,498 $1,636,000
5/1/2005 -
5/31/2005 - - 1,549,498 1,636,000
6/1/2005 -
6/30/2005 - - 1,549,498 1,636,000
(1) In March 1998, the Company announced that its Board
authorized the repurchase of up to $10,000,000 of its common
stock. The plan does not have a termination date.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's Annual Meeting of Stockholders was held on
June 3, 2005.
Proxies for the Annual Meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934, as
amended. There was no solicitation in opposition to
management's nominees as listed in the Proxy Statement.
The matters voted upon at the Annual Meeting and the results
thereof were as follows:
1. To elect Class II Directors, Robert Schnell and David
Walsh, each to hold office for a three-year term and
until each of their successors are elected and qualified.
FOR AGAINST ABSTAINED
Robert Schnell 8,368,696 0 98,020
David Walsh 8,368,856 0 97,860
2. To ratify the election of Singer Lewak Greenbaum and
Goldstein LLP as independent certified public accountants
for the year ending December 31, 2005.
FOR AGAINST ABSTAINED
8,464,783 1,200 733
ITEM 5: OTHER INFORMATION
Not applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Asset Purchase Agreement, dated May 20,
2005, by and among The Walking Company, as
buyer, Bianca of Nevada, Inc., a Nevada
corporation, as seller, and Sal Palermo, as
shareholder.
31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification 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
99.1 First Amended, Restated and Consolidated
Loan and Security Agreement, dated July 7,
2005, among the lenders signatory thereto,
Wells Fargo Retail Finance II, LLC, as
agent, and Big Dog Holdings, Inc., Big Dog
USA, Inc., and The Walking Company, as
borrowers.
(b) Reports on Form 8-K
On May 5, 2005 the Company filed a Form 8-K to
disclose first quarter financial results.
On May 23, 2005, the Company filed a Form 8-K to
announce The Walking Company had entered into an
Asset Purchase Agreement to acquire the
Footwooks Division of Bianca of Nevada, Inc.
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.
August 12, 2005 /s/ ANDREW D. FESHBACH
----------------------
Andrew D. Feshbach
President and Chief Executive Officer
(Principal Executive Officer)
August 12, 2005 /s/ ROBERTA J. MORRIS
---------------------
Roberta J. Morris
Chief Financial Officer and Treasurer
(Principal Financial Officer)