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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, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22963
BIG DOG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1868665
(State or jurisdiction of (IRS employer
incorporation or organization) identification no.)
121 GRAY AVENUE
SANTA BARBARA, CALIFORNIA 93101
(Address of principal executive offices) (zip code)
(805) 963-8727
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X Yes No
--- ---
The number of shares outstanding of the registrant's common stock, par value
$.01 per share, at November 1, 2003 was 8,243,132 shares.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
NO.
----
PART 1. FINANCIAL INFORMATION (Unaudited).............................3
ITEM 1: FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and December 31, 2002......................3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months and nine months ended September 30, 2003
and 2002......... ............................................4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2003 and 2002.................5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....................6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.....................................8
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....12
ITEM 4: CONTROLS AND PROCEDURES.......................................12
PART II: OTHER INFORMATION.............................................12
ITEM 1: LEGAL PROCEEDINGS.............................................12
ITEM 2: CHANGES IN SECURITIES.........................................13
ITEM 3: DEFAULTS UPON SENIOR SECURITIES...............................13
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........13
ITEM 5: OTHER INFORMATION.............................................13
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K..............................13
SIGNATURES................................................................14
PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2003 2002
------------------ ------------------
ASSETS (Note 3)
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 576,000 $ 6,194,000
Accounts receivable, net......................................... 257,000 459,000
Inventories...................................................... 33,319,000 24,808,000
Prepaid expenses and other current assets........................ 1,238,000 457,000
Deferred income taxes............................................ 1,928,000 1,960,000
------------------ ------------------
Total current assets........................................... 37,318,000 33,878,000
PROPERTY AND EQUIPMENT, Net......................................... 4,404,000 5,234,000
INTANGIBLE ASSETS, Net.............................................. 115,000 149,000
OTHER ASSETS........................................................ 285,000 418,000
------------------ ------------------
TOTAL............................................................... $42,122,000 $ 39,679,000
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings............................................ $ 2,873,000 $ ---
Accounts payable................................................. 4,397,000 1,935,000
Income taxes payable............................................. --- 555,000
Accrued expenses and other current liabilities................... 2,579,000 4,159,000
------------------ ------------------
Total current liabilities...................................... 9,849,000 6,649,000
DEFERRED RENT....................................................... 627,000 693,000
DEFERRED GAIN ON SALE-LEASEBACK..................................... 314,000 354,000
------------------ ------------------
Total liabilities................................................ 10,790,000 7,696,000
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 3,000,000 shares authorized, none
issued and outstanding......................................... $ --- $ ---
Common stock, $.01 par value, 30,000,000 shares authorized,
9,698,284 issued at September 30, 2003 and December 31, 2002...
97,000 97,000
Additional paid-in capital....................................... 20,510,000 20,510,000
Retained earnings................................................ 18,579,000 18,824,000
Treasury stock, 1,455,152 and 1,305,636 shares at September 30,
2003 and December 31, 2002, respectively....................... (7,854,000) (7,448,000)
------------------ ------------------
Total stockholders' equity..................................... 31,332,000 31,983,000
------------------ ------------------
TOTAL............................................................... $ 42,122,000 $ 39,679,000
================== ==================
See notes to the consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
----------------- ------------- ---------------- ----------------
NET SALES............................................... $ 29,487,000 $ 30,114,000 $ 69,049,000 $ 73,423,000
COST OF GOODS SOLD...................................... 12,658,000 12,697,000 29,899,000 31,732,000
----------------- --------------- ---------------- ----------------
GROSS PROFIT............................................ 16,829,000 17,417,000 39,150,000 41,691,000
----------------- --------------- ---------------- ----------------
OPERATING EXPENSES:
Selling, marketing and distribution................ 12,390,000 13,117,000 35,584,000 37,295,000
General and administrative......................... 1,189,000 1,289,000 3,723,000 3,740,000
----------------- --------------- ---------------- ----------------
Total operating expenses....................... 13,579,000 14,406,000 39,307,000 41,035,000
----------------- --------------- ---------------- ----------------
INCOME (LOSS) FROM OPERATIONS........................... 3,250,000 3,011,000 (157,000) 656,000
INTEREST INCOME......................................... --- (1,949,000) (1,000) (1,949,000)
INTEREST EXPENSE........................................ 75,000 2,137,000 240,000 2,368,000
----------------- --------------- ---------------- ----------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES .................................... 3,175,000 2,823,000 (396,000) 237,000
PROVISION (BENEFIT) FOR INCOME TAXES.................... 1,228,000 1,087,000 (151,000) 91,000
----------------- --------------- ---------------- ----------------
NET INCOME (LOSS)....................................... $ 1,947,000 $ 1,736,000 $ (245,000) $ 146,000
================= =============== ================ ================
NET INCOME (LOSS) PER SHARE
BASIC AND DILUTED.................................. $ 0.24 $ 0.21 $ (0.03) $ 0.02
================= =============== ================ ================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC.............................................. 8,264,000 8,393,000 8,328,000 8,415,000
================= =============== ================ ================
DILUTED............................................ 8,265,000 8,393,000 8,328,000 8,415,000
================= =============== ================ ================
See notes to the consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
September 30,
-------------------------------------
2003 2002
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ (245,000) $ 146,000
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization....................... 1,613,000 2,013,000
Amortization of deferred financing fees............. 114,000 115,000
Provision for losses on receivables................. (24,000) 52,000
Loss on disposition of property and equipment....... 3,000 16,000
Deferred income taxes............................... 32,000 (47,000)
Changes in operating assets and liabilities:
Receivables.................................... 226,000 382,000
Inventories.................................... (8,511,000) (5,733,000)
Prepaid expenses and other assets.............. (781,000) (1,134,000)
Accounts payable............................... 2,462,000 3,051,000
Income taxes payable........................... (555,000) (1,892,000)
Accrued expenses and other current liabilities. 1,580,000) (1,454,000)
Deferred rent.................................. (66,000) 69,000
Deferred gain on sale-leaseback................ (40,000) (39,000)
---------------- ----------------
Net cash used in operating activities...... (7,352,000) (4,455,000)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................... (746,000) (965,000)
Proceeds from sale of U.S. Treasury bonds................ --- 95,269,000
Collateral required for repurchase of U.S. Treasury
Bonds.................................................. --- (95,338,000)
Proceeds from sale of property and equipment............. 7,000 16,000
Principal repayments of notes receivable................. --- 16,000
Other.................................................... 6,000 (61,000)
----------------- -----------------
Net cash used in investing activities....... (733,000) (1,063,000)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net............................... 2,873,000 3,556,000
Repurchase of common stock............................... (406,000) 242,000)
---------------- -----------------
Net cash provided by financing activities... 2,467,000 3,314,000
---------------- -----------------
NET DECREASE IN CASH.......................................... (5,618,000) (2,204,000)
CASH, BEGINNING OF PERIOD..................................... 6,194,000 3,055,000
---------------- -----------------
CASH, END OF PERIOD........................................... $ 576,000 $ 851,000
================ =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest............................................. $ 239,000 $ 239,000
Income taxes......................................... $ 373,000 $ 2,030,000
See notes to the consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in
the United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting only of
normal recurring entries necessary for a fair presentation have been included.
Operating results for the three-month and nine-month periods ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. 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, 2002.
Note 2. Accounting for Stock-based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation, requires companies to estimate
employee stock compensation expense based on the fair value method of
accounting. However, the statement allows the alternative of continued use of
the intrinsic value method described in Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, if pro forma
disclosure of fair value amounts is provided. The Company has elected the
alternative of continued use of APB Opinion No. 25.
The following table illustrates the effect on net income and earnings
per share as if the fair value based method had been applied to all outstanding
and unvested stock option awards in each period presented:
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2003 2002 2003 2002
Net income (loss):
As reported...................................... $ 1,947,000 $ 1,736,000 $ (245,000) $ 146,000
Deduct: Total stock-based employee compensation
expense determined under fair value method, net
of related tax effects.......................... 160,000 174,000 513,000 570,000
-------------- -------------- ------------- --------------
Pro forma........................................ $ 1,787,000 $ 1,562,000 $ (758,000) $ (424,000)
============== ============== ============= ==============
Net income (loss) per share:
As reported:
Basic and diluted................................ $ 0.24 $ 0.21 $ (0.03) $ 0.02
Pro forma:
Basic and diluted................................ $ 0.22 $ 0.19 $ (0.09) $ (0.05)
Antidilutive options............................. 1,719,000 1,694,000 1,720,000 1,694,000
NOTE 3. Short-term Borrowings
In October 2001, the Company entered into a $30.0 million three-year
line of credit facility with Wells Fargo Retail Finance. This facility is
collateralized by substantially all of the Company's assets and requires
daily, weekly and monthly financial reporting as well as compliance with
financial, affirmative and negative covenants. This credit agreement provides
for a performance-pricing structured interest charge, ranging up to LIBOR
plus 1.75% which is based on excess availability levels. As of September 30,
2003, the Company had $2.9 million outstanding under this credit agreement.
Additionally, the Company had $0.9 million of letters of credit outstanding
as of September 30, 2003. The letters of credit expire through December 2003.
NOTE 4. Stockholder's Equity
In March 1998, the Company announced that its Board authorized the
repurchase of up to $10,000,000 of its common stock. As of September 30,
2003, the Company has repurchased 1,455,152 shares totaling $7,854,000.
NOTE 5. Short Bond Transaction
During July 2002, the Company entered into two transactions relating
to the short-sale and repurchase of $95.4 million of U.S. Treasury Securities.
The transactions were intended to address interest rate exposure and generate
capital gains that could be used to offset previously incurred capital
losses. The first transaction, which represented $95.4 million of U. S.
Treasury Securities, matured on November 15, 2002. In the second transaction,
the Company repurchased $95.4 million of U. S. Treasury Securities on November
15, 2002. As of September 30,2002 the Company had recorded interest income of
$1.9 million, interest expense of $2.0 million, and an obligation of
$.1 million included in accured expenses and other current liabilities related
to these transactions.
NOTE 6. Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, Accounting for Asset Retirement Obligations, which
provides standards on the accounting for obligations associated with the
retirement of long-lived assets. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The adoption of this statement did not have
a significant impact on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses exit or disposal
activities including one-time involuntary employee termination benefits,
contract termination costs and costs to consolidate facilities or relocate
employees. Existing accounting guidelines (principally Emerging Issue Task
Force Issue 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity) require companies to recognize
a liability when management commits itself or announces plans to exit or
dispose of an activity. SFAS No. 146 will prohibit companies from
recognizing an exit or disposal liability until the liability has been
incurred, generally the "communication date" for one-time termination
benefits and the contract termination or "cease use date" for contract costs,
and will require these liabilities to be measured at fair value.
This statement is effective for exit or disposal activities initiated after
December 31, 2002. The adoption of the provisions of this statement did not
have a significant impact on our consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148. SFAS No. 123, as
amended by SFAS No. 148, requires companies to estimate employee stock
compensation expense based on the fair value method of accounting. However,
the statement allows the alternative of continued use of the intrinsic value
method described in APB Opinion No. 25, if pro forma disclosure of fair value
amounts is provided. The Company has elected the alternative of continued
use of APB Opinion No. 25. See Note 2.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement 133. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The adoption of this statement did not have an impact on our
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial position.
Previously, many of those financial instruments were classified as equity.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this statement
did not have an impact on our consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which elaborates on required
disclosures by a guarantor in its financial statements about obligations
under certain guarantees that it has issued and clarifies the need for a
guarantor to recognize, at the inception of certain guarantees, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company adopted the provisions of this Interpretation relating
to initial recognition and measurement of guarantor liabilities, which are
effective for qualifying guarantees entered into or modified after January 1,
2003. The disclosure requirements in this Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of this interpretation did not have an impact on the
Company's consolidated financial statements.
ITEM 2:
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis should be read in conjunction
with the Company's financial statements and notes related thereto.
Certain minor differences in the amounts below result from rounding of the
amounts shown in the consolidated financial statements.
This quarterly report on Form 10-Q contains forward-looking
statements within the meaning of federal securities laws, which are intended
to be covered by the safe harbors created thereby. Those statements include,
but may not be limited to, the discussions of the Company's operating and
growth strategy. Investors are cautioned that all forward-looking statements
involve risks and uncertainties including, without limitation, those set
forth under the caption "risk factors" in the business section of the
Company's annual report on Form 10-K for the year ended December 31, 2002.
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, 2002 filed with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2003 and 2002
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 decreased to $29.5 million for the three months
ended September 30, 2003 from $30.1 million for the same period in 2002,
a decrease of $0.6 million, or 2.0%. Of the decrease, $0.8 million was
attributable to a decrease in sales for stores not qualifying as comparable
stores, which includes the closure of unprofitable stores netted against
new stores opened in the period, and $0.1 million was attributable to a
decrease in the Company's wholesale business. This decrease was offset by $0.1
million attributable to a 0.2% comparable stores sales increase and $0.2
million attributable to an increase in the Company's mail order business.
GROSS PROFIT. Gross profit decreased to $16.8 million for the three
months ended September 30, 2003 from $17.4 million for the same period in
2002, a decrease of $0.6 million, or 3.4%. As a percentage of net sales,
gross profit decreased to 57.1% in the three months ended September 30, 2003
from 57.8% for the same period in 2002. The decrease was primarily
attributable to a change in sales mix and promotional activity during the
period.
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 decreased to $12.4 million in the three months ended
September 30, 2003 from $13.1 million for the same period for 2002, a decrease
of $0.7 million, or 5.3%. As a percentage of net sales, these expenses
decreased to 42.0% in the three months ended September 30, 2003 from 43.6% in
the same period in 2002, a decrease of 1.6%. The decrease in selling,
marketing and distribution expenses is primarily attributable to retail cost
expense reductions, particularly lease occupancy expenses, as well as lower
depreciation expense.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses consist of administrative salaries, corporate occupancy costs and
other corporate expenses. General and administrative expenses decreased to
$1.2 million for the three months ended September 30, 2003 from $1.3 million
for the same period in 2002. As a percentage of net sales, these expenses
decreased to 4.0% in the three months ended September 30, 2003 from 4.3% for
the same period in 2002.
INTEREST INCOME. For the three months ended September 30, 2002,
interest income related to interest earned on a short bond transaction.
During July 2002, the Company entered into two transactions relating to the
short-sale and repurchase of $95.4 million of U.S. Treasury Securities.
The transactions were intended to address interest rate exposure and generate
capital gains that could be used to offset previously incurred capital
losses. The first transaction, which represented $95.4 million of U.S.
Treasury Securities, matured on November 15, 2002. In the second transaction,
the Company repurchased $95.4 million of U. S. Treasury Securities on November
15, 2002. As of September 30, 2002, the Company had placed the proceeds from
the short sale into interest-bearing collateral account to provide for the
repurchase.
INTEREST EXPENSE. Interest expense decreased to $0.1 million for
the three months ended September 30, 2003 from $2.1 million for the same
period in 2002. The decrease was due to $2.0 million of interest expense
related to the Company's 2002 short bond transaction (See "Interest Income").
Otherwise, interest expense remained constant at $0.1 million.
INCOME TAXES. Income tax expense increased to $1.2 million for the
three months ended September 30, 2003 from $1.1 million for the same period
in 2002.
Nine Months Ended September 30, 2003 and 2002
NET SALES. Net sales decreased to $69.0 million for the nine months
ended September 30, 2003 from $73.4 million for the same period in 2002, a
decrease of $4.4 million, or 6.0%. Of the decrease, $3.2 million was
attributable to a 4.9% comparable stores sales decrease, $1.3 million was
attributable to a decrease in sales for stores not qualifying as comparable
stores, which includes the closure of unprofitable stores netted against new
stores opened in the period, and $0.3 million was attributable to a decrease
in the Company's wholesale business. This decrease was offset by a $0.4
million increase in the Company's mail order business. The decrease in
comparable store sales is primarily related to lower traffic in the Company's
stores.
GROSS PROFIT. Gross profit decreased to $39.2 million for the nine
months ended September 30, 2003 from $41.7 million for the same period in
2002, a decrease of $2.5 million, or 6.0%. As a percentage of net sales,
gross profit remained relatively constant at 56.7% for the nine months ended
September 30, 2003 compared to 56.8% for the same period in 2002.
SELLING, MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and
distribution expenses decreased to $35.6 million in the nine months ended
September 30, 2003 from $37.3 million in the same period for 2002, a decrease
of $1.7 million, or 4.6%. The decrease in selling, marketing and distribution
expenses is primarily attributable to retail cost expense reductions,
particularly lease occupancy expenses, as well as lower depreciation expense.
As a percentage of net sales, these expenses increased to 51.5% in the nine
months ended September 30, 2003 from 50.8% in the same period in 2002, an
increase of 0.7%. The increase as a percentage of net sales is a result of
having a lower sales base.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the nine months ended September 30, 2003 and 2002 remained
constant at $3.7 million. As a percentage of net sales, these expenses
increased to 5.4% in the nine months ended September 30, 2003 from 5.1% in
the same period in 2002. The increase as a percentage of net sales is a
result of having a lower sales base.
INTEREST INCOME. For the three months ended September 30, 2002,
interest income related to interest earned on a short bond transaction.
During July 2002, the Company entered into two transactions relating to the
short-sale and repurchase of $95.4 million of U.S. Treasury Securities.
The transactions were intended to address interest rate exposure and generate
capital gains that could be used to offset previously incurred capital
losses. The first transaction, which represented $95.4 million of U.S.
Treasury Securities, matured on November 15, 2002. In the second transaction,
the Company repurchased $95.4 million of U. S. Treasury Securities on November
15, 2002. As of September 30, 2002, the Company had placed the proceeds from
the short sale into interest-bearing collateral account to provide for the
repurchase.
INTEREST EXPENSE. Interest expense decreased to $0.2 million for the
nine months ended September 30, 2003 from $2.4 million for the same period
in 2002. Such decrease was primarily due to $2.0 million of interest expense
related to the Company's short bond transaction (See "Interest Income").
Otherwise, interest expense decreased to $0.2 million from $0.4 million for
the same period in 2002 related to lower average outstanding short-term
borrowings during the 2003 period as compared to 2002.
INCOME TAXES. The Company recorded an income tax benefit in 2003
at its historical effective income tax rate of 38.5%. The Company believes
it will fully realize this benefit due to projected seasonal net income in
the fourth quarter as discussed in "Seasonality" below, or from net operating
loss carrybacks to previous years.
LIQUIDITY AND CAPITAL RESOURCES
During the third quarter of 2003, the Company"s primary uses of cash
were for merchandise inventories, accrued liabilities and capital
expenditures. The Company satisfied its cash requirements from existing
cash balances and short-term borrowings under its credit agreement.
Cash used in operating activities was $7.4 million and $4.5 million
for the nine months ended September 30, 2003 and 2002, respectively.
The increase in cash used in operating activities is principally due to an
increase in inventory purchases during the period.
Cash used in investing activities was $0.7 million and $1.1 million
for the nine months ended September 30, 2003 and 2002, respectively. Cash
used in investing activities in 2003 primarily related to 2 new store openings
and capital additions to the Company's existing stores. Cash used in
investing activities in the first nine months of 2002 primarily related to 6
new store openings and capital additions to the Company's existing stores.
Additionally in the 2002 period, the Company had an offsetting investment
transaction related to the short bond transaction (See Note 5. Short Bond
Transaction) whereby $95.3 million of proceeds from the sale of U.S. Treasury
Bonds was offset by $95.3 million in collateral required for the repurchase
of such bonds.
Cash provided by financing activities decreased to $2.5 million
in the nine months ended September 30, 2003 from $3.3 million in the same
period in 2002. In the nine months ended September 30, 2003, the Company had
net borrowings of $2.9 million under its borrowing agreement and used $0.4
million to repurchase common stock. In the nine months ended September 30,
2002, the Company had net borrowings of $3.6 million under its borrowing
agreement and used $0.2 million to repurchase common stock.
In October 2001, the Company entered into a $30.0 million three-year
line of credit facility with Wells Fargo Retail Finance. This facility is
collateralized by substantially all of the Company's assets and requires
daily, weekly and monthly financial reporting as well as compliance with
financial, affirmative and negative covenants. This credit agreement provides
for a performance-pricing structured interest charge, ranging up to LIBOR
plus 1.75% which is based on excess availability levels. As of September 30,
2003, the Company had $2.9 million outstanding under this credit agreement.
Additionally, the Company had $0.9 million of letters of credit outstanding
as of September 30, 2003. The letters of credit expire through December 2003.
The Company has made no changes to its critical accounting policies
as disclosed in the Annual Report on Form 10-K for the year ended December 31,
2002.
COMMITMENTS AND OBLIGATIONS
As of September 30, 2003, we had the following obligations:
Amounts of Commitment Expiration per Period
-------------------------------------------
Total
-----
Amounts Less than 1 Over 5
------- ----------- ------
Committed year 1 to 3 years 4 to 5 years years
--------- ---- ------------ ------------ ------
Contractual Obligations:
Operating leases............................. $38,122,000 $13,592,000 $16,911,000 $5,841,000 $1,778,000
Other Commercial Commitments:
Letters of credit.......................... 599,000 599,000 --- --- ---
Standby letters of credit.................. 315,000 315,000 --- --- ---
----------- ----------- ----------- ----------- ----------
Total Commitments............................ $39,036,000 $14,506,000 $16,911,000 $5,841,000 $1,778,000
----------- ----------- ----------- ---------- ----------
SEASONALITY
The Company believes its seasonality is somewhat different than many
apparel retailers since a significant number of the Company's stores are
located in tourist areas and outdoor malls that have different visitation
patterns than urban and suburban retail centers. The third and fourth quarters (
consisting of the summer vacation, back-to-school and Christmas seasons) have
historically accounted for the largest percentage of the Company's annual
sales and profits. The Company has historically incurred operating losses
in its first quarter and may be expected to do so in the foreseeable future.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe it has material exposure to losses from
market-rate sensitive instruments. The Company has not invested in
derivative financial instruments. The Company has a credit facility with a
performance-pricing structured-interest charge, ranging up to LIBOR plus 1.75%
based on excess availability 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 September 30, 2003, the Company completed an evaluation, under
the supervision and with the participation of the Company's chief executive
officer and chief financial officer of the effectiveness of the Company's
disclosure controls and procedures. Based on this evaluation, the Company's
chief executive officer and chief financial officer concluded that the
Company's disclosure controls and procedures were effective in making known
to them all material information required to be disclosed in this report as
it related to the Company and its subsidiaries. There have been no
significant changes in the Company's internal controls or in other factors
that could significantly affect the internal controls subsequent to the date
the Company completed this evaluation.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is involved from time to time in litigation incidental
to its business. The Company believes that the outcome of such
litigation will not have a material adverse effect on its operation
or financial condition.
ITEM 2: CHANGES IN SECURITIES
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
Not applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(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 13, 2003 /s/ ANDREW D. FESHBACH
----------------------
Andrew D. Feshbach
President and Chief Executive Officer
(Principal Executive Officer)
November 13, 2003 /s/ ROBERTA J. MORRIS
Roberta J. Morris
Chief Financial Officer and Treasurer
(Principal Financial Officer)