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 September 30, 1998 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 77-0395316 (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 The number of shares outstanding of the registrant's common stock, par value $.01 per share, at November 12, 1998 was 12,100,350 shares. BIG DOG HOLDINGS, INC INDEX TO FORM 10-Q PART 1 FINANCIAL INFORMATION ITEM I: FINANCIAL STATEMENTS (Unaudited) Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 ...................... 3 Consolidated Statements of Operations - Three months and nine months ended September 30, 1998 and 1997 4 Consolidated Statements of Cash Flow - Nine months ended September 30, 1998 and 1997 ................. 5 Notes to Consolidated Financial Statements .................... 6 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations ........................... 7 ITEM 3: Quantitative and Qualitative Disclosures about Market Risk ................................................... 11 PART II OTHER INFORMATION ITEM 1: Legal Proceedings ................................................... 11 ITEM 2: Changes in Securities ............................................... 11 ITEM 3: Defaults upon Senior Securities ..................................... 11 ITEM 4: Submission of Matters to a Vote of Security Holders ................. 11 ITEM 5: Other Information ................................................... 11 ITEM 6: Exhibits and Reports on Form 8-K .................................... 11 SIGNATURE PAGE .............................................................. 12 PART 1 FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS BIG DOG HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS September 30, December 31, 1998 1997 ------------------- ------------------- (Unaudited) ASSETS CURRENT ASSETS: Cash $ 936,000 $ 23,508,000 Accounts receivable, net 1,049,000 751,000 Inventories 30,952,000 16,714,000 Prepaid expenses and other current assets 2,291,000 744,000 Deferred income taxes 384,000 144,000 ------------------- ------------------- Total current assets 35,612,000 41,861,000 PROPERTY AND EQUIPMENT, Net 12,435,000 10,232,000 INTANGIBLE ASSETS, Net 25,000 131,000 OTHER ASSETS 646,000 360,000 =================== =================== TOTAL $ 48,718,000 $ 52,584,000 =================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 5,759,000 $ 2,767,000 Income taxes payable 361,000 1,395,000 Accrued expenses and other current liabilities 2,196,000 2,231,000 ------------------- ------------------- Total current liabilities 8,316,000 6,393,000 DEFERRED RENT 799,000 650,000 ------------------- ------------------- Total liabilities $ 9,115,000 $ 7,043,000 ------------------- ------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 3,000,000 shares authorized, 0 issued and outstanding Common stock $.01 par value, 30,000,000 shares authorized, 12,100,350 and 13,159,550 issued and outstanding at September 30, 1998 and December 31, 1997, respectively $ 132,000 $ 132,000 Additional paid-in capital 42,280,000 42,224,000 Retained earnings 4,180,000 3,732,000 Treasury stock, 1,083,200 shares at September 30, 1998 (6,479,000) - Notes receivable from common stockholders (510,000) (547,000) ------------------- ------------------- Total stockholders' equity 39,603,000 45,541,000 ------------------- ------------------- TOTAL $ 48,718,000 $ 52,584,000 =================== =================== See accompanying notes. BIG DOG HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended Nine Months Ended September 30, September 30, --------------------------------------- --------------------------------------- 1998 1997 1998 1997 ------------------ ------------------ ------------------ ------------------ (Unaudited) (Unaudited) NET SALES $ 28,354,000 $ 24,129,000 $ 64,955,000 $ 55,272,000 COST OF GOODS SOLD 11,266,000 10,022,000 26,644,000 23,230,000 ------------------ ------------------ ------------------ ------------------ GROSS PROFIT 17,088,000 14,107,000 38,311,000 32,042,000 ------------------ ------------------ ------------------ ------------------ OPERATING EXPENSES: Selling, marketing and distribution 11,895,000 9,879,000 34,111,000 27,643,000 General and administrative 1,330,000 1,118,000 3,812,000 3,229,000 ------------------ ------------------ ------------------ ------------------ Total operating expenses 13,225,000 10,997,000 37,923,000 30,872,000 ------------------ ------------------ ------------------ ------------------ INCOME FROM OPERATIONS 3,863,000 3,110,000 388,000 1,170,000 INTEREST EXPENSE (INCOME), NET (33,000) 518,000 (340,000) 1,485,000 ------------------ ------------------ ------------------ ------------------ INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES 3,896,000 2,592,000 728,000 (315,000) PROVISION (BENEFIT) FOR INCOME TAXES 1,496,000 985,000 280,000 (119,000) ------------------ ------------------ ------------------ ------------------ NET INCOME (LOSS) $ 2,400,000 $ 1,607,000 $ 448,000 $ (196,000) ================== ================== ================== ================== NET INCOME (LOSS) PER SHARE: BASIC $ 0.20 $ 0.16 $ 0.04 $ (0.02) ================== ================== ================== ================== DILUTED $ 0.20 $ 0.15 $ 0.04 $ (0.02) ================== ================== ================== ================== WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC 12,183,000 10,355,000 12,599,000 10,227,000 DILUTED 12,204,000 10,652,000 12,643,000 10,227,000 See accompanying notes. BIG DOG HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, -------------------------------------- 1998 1997 ------------------ ----------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 448,000 $ (196,000) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 2,745,000 1,841,000 Provision for losses on receivables 23,000 18,000 Loss on disposition of property and equipment 81,000 36,000 Deferred income taxes (240,000) (157,000) Changes in operating assets and liabilities: Receivables (320,000) 123,000 Inventories (14,238,000) (6,118,000) Prepaid expenses and other assets (1,547,000) (1,060,000) Accounts payable 2,992,000 2,605,000 Income taxes payable (1,034,000) (400,000) Accrued expenses and other current liabilities (35,000) 293,000 Deferred rent 149,000 164,000 ------------------ ----------------- Net cash used in operating activities (10,976,000) (2,851,000) ------------------ ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (4,936,000) (3,476,000) Proceeds from sale of capitalized assets 13,000 - Other (288,000) (7,000) ------------------ ----------------- Net cash used in investing activities (5,211,000) (3,483,000) ------------------ ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of common stock (6,494,000) - Proceeds from exercise of stock options and warrants 72,000 651,000 Principal repayments of notes receivable 37,000 - Principal repayments under capital lease obligations - (384,000) Short-term borrowings, net - 6,190,000 ------------------ ----------------- Net cash provided by (used in) financing activities (6,385,000) 6,457,000 ------------------ ----------------- NET INCREASE (DECREASE) IN CASH (22,572,000) 123,000 CASH, BEGINNING OF PERIOD 23,508,000 723,000 ================== ================= CASH, END OF PERIOD $ 936,000 $ 846,000 ================== ================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest $ 7,000 $ 1,416,000 Income taxes $ 1,553,000 $ 437,000 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: The Company entered into capital lease obligations of $18,000 for new equipment for the nine months ended September 30, 1997. On September 25, 1997 the Company's initial public offering of 2,800,000 shares of common stock for $14.00 per share became effective. At September 30, 1997, net proceeds of $36,456,000 were included in a receivable account. BIG DOG HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. Basis of Presentation: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information with the instructions to Form 10-Q and Rule 10-01 of Regulations S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 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 nine-month period ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the financial statements and footnotes thereto for Big Dog Holdings, Inc. and its wholly owned subsidiary, Big Dog USA, Inc. (the "Company") as of and for the years ended December 31, 1997, 1996 and 1995. NOTE 2. Basic Earnings (Net Loss) Per Share: Basic earnings (net loss) per share is calculated based on the weighted average number of shares outstanding. Diluted earnings (net loss) per share is calculated based on the same number of shares plus additional shares representing stock distributable under stock-based plans computed using the treasury stock method. NOTE 3. Short-term Borrowings The Company has a line of credit arrangement with a bank whereby the Company may borrow up to $8,000,000 as cash advances and letters of credit. Borrowings under the line of credit bear interest at the bank's prime loan rate less 3/8% or 250 basis points over the LIBOR rate. As of September 30, 1998 there were no borrowings. The line of credit expires on February 19, 1999 and is collateralized by substantially all assets of the Company. The Company has commitments under letters of credit totaling $712,000 at September 30, 1998. The letters of credit expire through December 31, 1998. NOTE 4. Stockholders' Equity Effective February 5, 1998, the Company amended the 1997 Performance Award Plan (the "Plan")to increase the maximum number of shares reserved for issuance under the Plan to 2,000,000. Effective April 7, 1998, the Company repriced (by canceling and reissuing) 444,750 options granted under the Plan. The re-priced options have a ten-year life and either (i) have an exercise price of $6.50 per share (fair market value at grant date) and vest in equal installments on each anniversary of the April 7 grant date over the next five years or (ii) as to officers, have an exercise price ranging from $6.50 to $10.00 and vest at varying rates of 10% to 20% per year on each anniversary of the April 7 grant date over the next seven years. Additionally, on April 7, 1998 the Company granted 1,086,650 options to certain employees and the Chairman of the Board on the same terms as the repriced options. In March 1998, the Company announced that its Board authorized the repurchase of up to $10,000,000 of its common stock. 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. RESULTS OF OPERATIONS Three Months Ended September 30, 1998 and 1997 NET SALES. Net sales consist of sales from the Company's stores, catalog, and wholesale accounts, all net of returns and allowances. Net sales increased to $28.4 million for the three months ended September 30, 1998 from $24.1 million for the same period in 1997, a net increase of $4.3 million. Of the net increase, $3.9 million was attributable to stores not yet qualifying as comparable stores, $0.1 million was attributable to the 0.5% increase in comparable store sales for the period and $0.3 million increase came from the Company's wholesale and catalog business. GROSS PROFIT. Gross profit increased to $17.1 million for the three months ended September 30, 1998 from $14.1 million for the same period in 1997, an increase of $3.0 million or 21.1%. As a percentage of net sales, gross profit increased to 60.3% in the three months ended September 30, 1998 from 58.5% in the same period in 1997. This 1.8% increase was primarily attributable to improved purchasing and sourcing of certain merchandise and the opening of its full-price stores, which operate at a higher gross margin than its outlet stores. The Company operated 19 and 5 full-price stores at September 30, 1998 and 1997, respectively. 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 $11.9 million in the three months ended September 30, 1998 from $9.9 million in the same period for 1997, an increase of $2.0 million, or 20.4%. As a percentage of net sales, these expenses increased to 42.0% in the three months ended September 30, 1998 from 40.9% in the same period in 1997. This increase in operating expenses as a percentage of net sales was primarily attributable to higher distribution expenses associated with the operations of the Company's new distribution facility. 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 $1.3 million in the three months ended September 30, 1998 from $1.1 million in the same period in 1997. As a percentage of net sales, these expenses increased to 4.7% in the three months ended September 30, 1998 from 4.6% in the comparable 1997 period. INTEREST INCOME AND EXPENSE. Interest income was $33,000 in the three months ended September 30, 1998 compared to $0.5 million in interest expense in the same period in 1997. In October 1997, the Company's initial public offering closed and all debt was paid off with a portion of the net proceeds. Subsequently, proceeds were held in a money market fund. Nine Months Ended September 30, 1998 and 1997 NET SALES. Net sales consist of sales from the Company's stores, catalog, and wholesale accounts, all net of returns and allowances. Net sales increased to $65.0 million for the nine months ended September 30, 1998 from $55.3 million for the same period in 1997, an increase of $9.7 million. Of the increase, $9.4 million was attributable to stores not yet qualifying as comparable stores, $0.2 million was attributable to the 0.5% increase in comparable store sales for the period and $0.1 million increase came from the Company's wholesale and catalog business. GROSS PROFIT. Gross profit increased to $38.3 million for the nine months ended September 30, 1998 from $32.0 million for the same period in 1997, an increase of $6.3 million or 19.6%. As a percentage of net sales, gross profit increased to 59.0% in the nine months ended September 30, 1998 from 58.0% in the same period in 1997. This 1.0% increase was primarily attributable to improved purchasing and sourcing of certain merchandise. 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 $34.1 million in the nine months ended September 30, 1998 from $27.6 million in the same period for 1997, an increase of $6.5 million, or 23.4%. As a percentage of net sales, these expenses increased to 52.5% in the nine months ended September 30, 1998 from 50.0% in the same period in 1997. This increase in operating expenses as a percentage of net sales was primarily attributable to higher distribution expenses associated with the operations of the Company's new distribution facility. 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 $3.8 million in the nine months ended September 30, 1998 from $3.2 million in the same period in 1997. As a percentage of net sales, these expenses increased to 5.9% in the nine months ended September 30, 1998 from 5.8% in the comparable 1997 period. INTEREST INCOME AND EXPENSE. Interest income increased to $0.3 million in the nine months ended September 30, 1998 from $1.5 million in interest expense in the same period in 1997. In October 1997, the Company's initial public offering closed and all debt was paid off with a portion of the net proceeds. Subsequently, proceeds were held in a money market fund. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 30, 1998, the Company's primary uses of cash were for the build-out of its new distribution center facility, new stores, purchase of merchandise inventories, payment of income taxes, and stock repurchases. The Company satisfied its cash requirements with the proceeds of its issuance of common stock in 1997. In March 1998, the Company's Board of Directors authorized the Company to repurchase up to $10 million of its common stock. As of September 30, 1998, the Company has repurchased 1,083,200 shares for $6,479,000. Cash used in operating activities was $11.0 million and $2.9 million for the nine months ended September 30, 1998 and 1997, respectively. The $8.1 million increase in the use of cash is primarily attributable to forward inventory purchases as well as increased inventory purchases for use in the management of the graphic T-shirt, mail order and wholesale businesses. Cash used in investment activities for the nine months ended September 30, 1998 and 1997 were $5.2 million and $3.5 million, respectively. Cash flows used in investment activities for the nine months ended September 30, 1998 related primarily to the build-out and equipment purchases for the Company's distribution facility and 22 new store openings. Cash used in financing activities in the nine months ended September 30, 1998 was $6.4 million compared to cash proceeds of $6.5 million during the same period in 1997. In the nine months ended September 30, 1998 the Company repurchased 1,083,200 shares of its common stock. In the same period in 1997, the Company received approximately $6.2 million under its revolving credit facility, repaid capital lease obligations of $0.4 million, and received $0.7 million from the exercise of stock options. The Company has a revolving credit facility with a bank that expires on February 19, 1999. The revolving credit facility provides for an $8 million line that can be used for cash advances and letters of credit. Interest on advances is payable at the bank's prime rate less 3/8% or 250 basis points over the LIBOR rate. SEASONALITY The Company's business is seasonal by nature. However, 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 close to break-even results in the second quarter. As the Company continues to open new stores this seasonal pattern in the foreseeable future will become even greater and will reflect a larger percentage of its sales and profits in the third and fourth quarters. YEAR 2000 The Company has conducted a review of its computer systems to determine and address any potential implications of "Year 2000 compliance." "Year 2000 compliance" refers to the inability of certain computer systems to recognize dates commencing on January 1, 2000. Such inability has the potential to materially adversely affect the operation of some computer systems. The Company currently believes that by upgrading its current software and converting to new software for certain tasks, it will remedy any potential material Year 2000 compliance issues and further believes that such compliance tasks will not pose significant operations problems nor be material to its financial position or results of operations in any given year. STATEMENT REGARDING FORWARD LOOKING DISCLOSURE Certain sections of this Quarterly Report on Form 10-Q, including the preceding "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain various forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, which represents the Company's expectations or beliefs concerning future events. These forward looking statements involve risk and uncertainties, and the Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward looking statements. Primary factors that could cause actual results to differ are indicated in the Company's Form 10-K for the year ending December 31, 1997 and Prospectus dated September 25, 1997 filed with the Securities and Exchange Commission. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable PART II. OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS Not applicable ITEM 2: CHANGES IN SECURITIES Not applicable 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 ITEM 6: EXHIBITS AND REPORTS ON 8-K (a) Exhibits Exhibit No. Document Description 27.1 Financial Data Schedule (b) Reports on Form 8-K - Not applicable 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. November 12, 1998 /s/ ANDREW D. FESHBACH Andrew D. Feshbach President and Chief Executive Officer (Principal Executive Officer) November 12, 1998 /s/ ROBERTA J. MORRIS Roberta J. Morris Chief Financial Officer and Treasurer + (Principal Financial Officer)