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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 March 31, 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 May 3, 2005 was 9,183,932 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
March 31, 2005 (Unaudited) and December 31, 2004............. 3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended March 31, 2005 and 2004................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, 2005 and 2004................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................... 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 14
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 19
ITEM 4: CONTROLS AND PROCEDURES...................................... 19
PART II: OTHER INFORMATION............................................ 19
ITEM 1: LEGAL PROCEEDINGS............................................ 19
ITEM 2: CHANGES IN SECURITIES,USE OF PROCEEDS AND ISSUER
PURCHASE OF EQUITY SECURITIES................................ 19
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.............................. 19
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 19
ITEM 5: OTHER INFORMATION............................................ 19
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K............................. 19
SIGNATURES..................................................................... 20
PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004
---------------------- ----------------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 428,000 $ 4,670,000
Receivables, net 555,000 411,000
Inventories, net 51,917,000 39,581,000
Prepaid expenses and other current assets 1,480,000 928,000
Deferred income taxes 4,119,000 1,691,000
---------------------- ----------------------
Total current assets 58,499,000 47,281,000
PROPERTY AND EQUIPMENT, Net 9,357,000 9,956,000
INTANGIBLE ASSETS, Net 172,000 172,000
DEFERRED INCOME TAXES 366,000 1,042,000
OTHER ASSETS 358,000 380,000
---------------------- ----------------------
TOTAL $ 68,752,000 $ 58,831,000
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 8,811,000 $ 304,000
Current portion of long-term debt 247,000 243,000
Accounts payable 12,628,000 5,033,000
Income taxes payable - 2,643,000
Accrued expenses and other current liabilities 4,977,000 6,331,000
---------------------- ----------------------
Total current liabilities 26,663,000 14,554,000
NOTES PAYABLE 265,000 289,000
CAPITAL LEASE OBLIGATIONS 209,000 256,000
DEFERRED RENT AND LEASE INCENTIVES 1,240,000 943,000
DEFERRED GAIN ON SALE-LEASEBACK 235,000 248,000
---------------------- ----------------------
Total liabilities 28,612,000 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,
10,712,030 and 10,709,030 issued at March 31, 2005 and December
31, 2004, respectively 107,000 107,000
Additional paid-in capital 25,528,000 25,513,000
Retained earnings 22,733,000 25,149,000
Treasury stock, 1,529,998 at March 31, 2005 and December 31,
2004, respectively (8,228,000) (8,228,000)
---------------------- ----------------------
Total stockholders' equity 40,140,000 42,541,000
---------------------- ----------------------
TOTAL $ 68,752,000 $ 58,831,000
====================== ======================
See notes to the consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three months ended
March 31,
--------------------------------------------------
2005 2004
---------------------- ----------------------
NET SALES........................................................... $ 31,345,000 $ 21,880,000
COST OF GOODS SOLD.................................................. 15,118,000 10,659,000
---------------------- ----------------------
GROSS PROFIT........................................................ 16,227,000 11,221,000
---------------------- ----------------------
OPERATING EXPENSES:
Selling, marketing and distribution............................... 18,267,000 14,131,000
General and administrative........................................ 1,743,000 1,797,000
---------------------- ----------------------
Total operating expenses...................................... 20,010,000 15,928,000
---------------------- ----------------------
LOSS FROM OPERATIONS................................................ (3,783,000) (4,707,000)
INTEREST INCOME..................................................... 40,000 7,000
INTEREST EXPENSE.................................................... (151,000) (132,000)
---------------------- ----------------------
LOSS BEFORE BENEFIT FOR INCOME TAXES................................ (3,894,000) (4,832,000)
BENEFIT FOR INCOME TAXES............................................ (1,480,000) (1,836,000)
---------------------- ----------------------
NET LOSS................................................... ........ $ (2,414,000) $ (2,996,000)
====================== ======================
NET LOSS PER SHARE:
BASIC AND DILUTED............................................... $ (0.26) $ (0.36)
====================== ======================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC AND DILUTED............................................... 9,180,000 8,244,000
====================== ======================
See notes to the consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended
March 31,
--------------------------------------------------------
2005 2004
------------------------ -------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(2,414,000) $(2,996,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 953,000 643,000
Compensation expense - 328,000
Amortization of deferred financing fees 57,000 38,000
Provision for losses on receivables - 5,000
Loss on disposition of property and equipment 3,000 9,000
Deferred income taxes (1,753,000) (1,836,000)
Changes in operating assets and liabilities:
Receivables (144,000) (301,000)
Inventories (12,337,000) (4,270,000)
Prepaid expenses and other assets (596,000) 1,218,000
Accounts payable 7,595,000 3,545,000
Income taxes payable (2,643,000) (1,475,000)
Accrued expenses and other current liabilities (1,347,000) (3,580,000)
Deferred rent 297,000 (9,000)
Deferred gain on sale-leaseback (13,000) (14,000)
------------------------ -------------------------
Net cash used in operating activities (12,342,000) (8,695,000)
------------------------ -------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (356,000) (199,000)
Proceeds from the sales of property and equipment 1,000 -
Acquisition of The Walking Company, net of cash acquired - (1,577,000)
------------------------ -------------------------
Net cash used in investing activities (355,000) (1,776,000)
------------------------ -------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement 8,507,000 1,207,000
Repayment of notes payable (30,000) -
Exercise of stock options 15,000 16,000
Repayment of capital lease obligations (37,000) (4,000)
------------------------ -------------------------
Net cash provided by financing activities 8,455,000 1,219,000
------------------------ -------------------------
NET DECREASE IN CASH (4,242,000) (9,252,000)
CASH, BEGINNING OF PERIOD 4,670,000 10,503,000
------------------------ -------------------------
CASH, END OF PERIOD $ 428,000 $1,251,000
======================== =========================
See notes to the consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended
March 31,
---------------------------------------------
2005 2004
--------------------- --------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 82,000 $ 29,000
Income taxes $ 2,915,000 $ 1,468,000
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING ACTIVITIES:
ACQUISITION OF THE WALKING COMPANY:
Working capital, other than cash $ 197,000
Properties 6,962,000
Redeemable convertible notes and rights assumed (4,998,000)
Notes payable (584,000)
---------------------
Net cash effect due to acquisition of net assets of The Walking $ 1,577,000
Company
=====================
See Notes to 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 three months ended March 31,
2005 contain the results of operations since March 3, 2004, of the Company's
acquisition of primarily all the assets of The Walking Company. For a complete
description of the acquisition see Note 2 below.
In the opinion of management, all adjustments, consisting only of
normal recurring entries necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 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. 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 7,285,000
------------
Total assets acquired $ 22,106,000
------------
Current and other liabilities $ 15,454,000
Notes payable and rights issued 4,952,000
------------
Total liabilities assumed $ 20,406,000
------------
Net assets acquired over liabilities $ 1,700,000
============
The following table presents unaudited results of the combined
operations for the three months ended March 31, 2005 and 2004, respectively,
with the results of the period ending March 31, 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.
Three months ended
March 31,
-------------------------------------------------
2005 2004
--------------------- --------------------
Net sales $31,345,000 $30,199,000
Net loss (2,414,000) (3,547,000)
Net loss per common share:
Basic and diluted $ (0.26) $ (0.43)
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.
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 August 2004 (the
"Amended Credit Agreement"). The Amended Credit Agreement, which expires in
March 2007, provides for a total commitment of $28,000,000 with the ability for
the Company to issue documentary and standby letters of credit of up to $3
million. The Company's ability to borrow under the facility is determined using
an availability formula based on eligible assets. The facility is
collateralized by substantially all of the Company's assets and requires daily,
weekly and monthly financial reporting as well as compliance with financial,
affirmative and negative covenants. The most significant of these financial
covenants is 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
i nterest charge which is based on excess availability levels. The interest
rate ranges from the bank's base rate (5.75% at March 31, 2005) or a LIBOR loan
rate plus a margin ranging up to 1.75% (4.33% at March 31, 2005). As of March
31, 2005 and December 31, 2004, the Company had $6,907,000 and $0, respectively
outstanding under the Amended Credit Agreement. Additionally, the Company had
$392,000 and $899,000, respectively, of letters of credit outstanding as of
March 31, 2005 and December 31, 2004. The letters of credit expire through
April 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
March 25, 2005. The line is secured by substantially all assets of TWC and
requires daily, weekly and monthly financial reporting as well as compliance
with financial, affirmative and negative covenants. The most significant of
these financial covenants is compliance with a maximum annual capital
expenditure amount. For all periods presented, TWC was in compliance with all
covenants. This credit agreement provides for a performance-pricing structured
interest charge which is based on excess availability levels. The interest rate
is either the Bank's base rate (5.75% at March 31, 2005) or a lIBOR loan rate
plus a margin which ranges up to 2.75% (5.01% at March 31, 2005). At March 31,
2005 and December 31, 2004, TWC had approximately $1,905,000 and $304,000,
respectively outstanding under this credit agreement and $0 and $341,000,
respectively of outstanding letters of credit.
Long-term Borrowings
In March 2004, in conjunction with the acquisition of The Walking
Company, the Company also entered into a $3 million two-year unsecured
revolving promissory note facility with Israel Discount Bank ("IDB"). This
facility bears interest at IDB prime plus 1% and is 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
There were no borrowings as of December 31, 2004.
Redeemable Convertible Notes
In conjunction with the 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 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.
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
March 31, 2005 and December 31, 2004, $66,000 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
March 31, 2005 and December 31, 2004, the remaining notes had a balance of
$265,000 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 and earnings
per share as if the fair value based method had been applied to all outstanding
and unvested stock option awards in each period presented:
Three Months Ended
------------------
March 31,
--------
2005 2004
---- ----
Net loss:
As reported................................................. $ (2,414,000) $(2,996,000)
Add: Stock-based employee compensation expense included in
reported net loss, net of related tax effects.......... --- 114,000
Deduct: Total stock-based employee compensation expense
determined under fair value method, net of related tax
effects................................................. (90,000) (576,000)
------------- ------------
Pro forma................................................... $ (2,504,000) $(3,458,000)
============ ============
Net loss per share:
As reported:
Basic and diluted........................................... $ ( 0.26) $ (0.36)
Pro forma:
Basic and diluted........................................... $ (0.27) $ (0.42)
Antidilutive options......................................... 176,000 668,000
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 March 31, 2005, the
Company had repurchased 1,529,998 shares totaling $8,228,000. In April 2005,
the Company repurchased 19,500 shares totaling $136,000.
In conjunction with the acquisition, the Company issued to certain
former creditors of The Walking Company 10% (10,000 shares) of the outstanding
common stock of TWC, the subsidiary of the Company that acquired such assets
(the "minority interest"). The holders of the minority interest were also
provided the right to sell ("put") such shares to TWC for cash totaling
$645,000 through June 30, 2004 (the "stock put rights"). Additionally, these
holders received the right to instead convert the minority interest into
148,276 shares of common stock of the Company at a price of $4.35 per share
through June 30, 2004 (the "stock rights"). On April 23, 2004 TWC was merged
into a wholly owned subsidiary of the Company 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 180 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 74 Walking Company
stores located primarily in leading retail malls.
The accounting policies of the reportable segments are consistent with
the consolidated financial statements of the Company. The Company evaluates
individual store profitability in terms of a store's contribution which is
defined as gross margin less direct selling, occupancy, and certain indirect
selling costs. Below are the results of operations on a segment basis for the
three months ended March 31, 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 March 31, 2005
Statements of Income:
Sales $14,769,000 $16,576,000 $ 31,345,000
Net Loss $(1,964,000) $ (450,000) $ (2,414,000)
Balance Sheet:
Total assets $38,706,000 $30,046,000 $ 68,752,000
Three months ended March 31, 2004
Statements of Income:
Sales $16,626,000 $ 5,254,000 $ 21,880,000
Net Loss $(2,556,000) $ (440,000) $ (2,996,000)
Balance Sheet:
Total assets $37,835,000 $21,842,000 $ 59,677,000
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 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 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 March 31, 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 $31.3 million for the three months ended
March 31, 2005 from $21.9 million for the same period in 2004, an increase of
$9.4 million, or 42.9%. 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 $0.7 million was attributable to a 13.1% increase in
comparable store sales for TWC subsequent to the acquisition. The increase was
offset by $0.8 million attributable to a 5.6% decrease in Big Dog Sportswear
comparable store sales for the period, $0.6 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 $0.5 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 $16.2 million for the three
months ended March 31, 2005 from $11.2 million for the same period in 2004, an
increase of $5.0 million, or 44.6%. As a percentage of net sales, gross profit
increased to 51.8% in the three months ended March 31, 2005 from 51.3% for the
same period in 2004. TWC's gross profit increased in the three months ended
March 31, 2005 to 50.8% compared to 47.3% for 2004. The 3.5% increase was
primarily attributable to improved merchandise pricing from TWC vendors. The Big
Dogs' gross profit for the three month period ended March 31, 2005 remained
relatively constant at 52.8% compared to 52.5% in the same period in 2004. 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 $18.3 million in the three months ended March 31, 2005 from $14.1
million for the same period in 2004, an increase of $4.2 million, or 29.8%. The
$4.2 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 58.3% in the three months ended March 31, 2005 from 64.6% in the
same period in 2004, a decrease of 6.3%. The decrease is related to spreading
the expenses over a larger sales base.
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 $1.7
million for the three months ended March 31, 2005 from $1.8 million for the same
period in 2004. As a percentage of net sales, these expenses decreased to 5.6%
in the three months ended March 31, 2005 from 8.2% 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.
INTEREST INCOME. Interest income for the periods ended March 31, 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 increased to $0.2 million for the
three months ended March 31, 2005 from $0.1 million for the same period in 2004
The slight increase in interest expense was due to additional borrowings. Such
increased level of interest expense is expected to continue in future periods
as a result of The Walking Company acquisition.
INCOME TAXES. The Company recorded an income tax benefit at its
historical effective income tax rate of 38.0%. The Company believes it will
fully realize this benefit due to projected seasonal net income in the third
and fourth quarters as discussed in "Seasonality" below.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2005, the Company's primary
uses of cash were for merchandise inventories, income tax payments, and general
operating activity. The Company satisfied its cash requirements from existing
cash balances, short-term borrowings under its line of credit agreements and
other borrowings.
Cash used in operating activities was $12.3 million and $8.7 million
for the three months ended March 31, 2005 and 2004, respectively. The increase
in cash used in operating activities is principally due to an increase in TWC
merchandise inventory.
Cash used in investing activities was $0.4 million and $1.8 million
for the three months March 31, 2005 and 2004, respectively. Of the cash used in
investing activities in 2004, $1.6 million relates to the acquisition of The
Walking Company.
Cash provided by financing activities was $8.5 million in the three
months ended March 31, 2005 compared to $1.2 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 August 2004 (the
"Amended Credit Agreement"). The Amended Credit Agreement, which expires in
March 2007, provides for a total commitment of $28,000,000 with the ability for
the Company to issue documentary and standby letters of credit of up to $3
million. The Company's ability to borrow under the facility is determined using
an availability formula based on eligible assets. The facility is collateralized
by substantially all of the Company's assets and requires daily, weekly and
monthly financial reporting as well as compliance with financial, affirmative
and negative covenants. Prior to the amendment, the most significant of these
financial covenants was compliance with certain pre-defined earnings before
interest, income taxes, depreciation and amortization targets. As amended, the
more significant covenants include compliance with certain pre-defined capital
expenditures. For all periods presented, the Company was in compliance with this
and all other covenants. This credit agreement provides for a
performance-pricing structured interest charge, ranging up to LIBOR plus 1.75%
(5.75% at March 31, 2005), which is based on excess availability levels. As of
March 31, 2005 and December 31, 2004, the Company had $6,907,000 and $0,
respectively, outstanding under the Amended Credit Agreement. Additionally, the
Company had $392,000 and $899,000, respectively, of letters of credit
outstanding as of March 31, 2005 and December 31, 2004. The letters of credit
expire through April 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. The line is secured by substantially all
assets of TWC and requires daily, weekly and monthly financial reporting as well
as compliance with financial, affirmative and negative covenants. The most
significant of these financial covenants is compliance with certain pre-defined
earnings before interest and depreciation, accounts payable to inventory ratio
covenant and capital expenditures. For all periods presented, TWC was in
compliance with this and all other covenants. This credit agreement provides for
a performance-pricing structured interest charge, ranging up to LIBOR plus 2.75%
(5.75% at March 31, 2005), which is based on excess availability levels. As of
March 31, 2005 and December 31, 2004, TWC had approximately $1,905,000 and
$304,000, respectively outstanding under this credit agreement and $0 and
$341,000, respectively of outstanding letters of credit.
In March 2004, in conjunction with the acquisition of The Walking
Company, the Company also entered into a $3 million two-year unsecured revolving
promissory note facility with Israel Discount Bank ("IDB"). This facility bears
interest at IDB prime plus 1% and is 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 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 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 March 31, 2005 and December 31, 2004, $66,000 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 March 31, 2005 and December 31, 2004, the remaining notes
had a balance of $265,000 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 March 31, 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 $ 8,811,000 $8,811,000 $ - $ - $ -
Priority tax claims 331,000 66,000 132,000 133,000 -
Contractual Obligations:
Operating leases 83,372,000 22,443,000 32,884,000 17,307,000 10,738,000
Capital leases 390,000 181,000 209,000 - -
Other Commercial Commitments:
Letters of credit 392,000 392,000 - - -
--------------- --------------- --------------- --------------- ----------------
Total Commitments $93,296,000 $31,893,000 $33,225,000 $17,440,000 $10,738,000
=============== =============== =============== =============== ================
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. The Company's credit facilities
contain a performance-pricing structured-interest charge, ranging up to LIBOR
plus 2.75% based on excess availability levels. The Company's market risk on
interest rate movements will increase based on higher borrowing levels. See
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations-Liquidity and Capital Resources."
ITEM 4:
CONTROLS AND PROCEDURES
At March 31, 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
The Company is involved from time to time in litigation
incidental to its business. The Company believes that the
outcome of such litigation will not have a material adverse
effect on its operation or financial condition.
ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None
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 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
(b) Reports on Form 8-K
On January 27, 2005 the Company filed a Form 8-K to
disclose fourth quarter sales results.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIG DOG HOLDINGS, INC.
May 12, 2005 /s/ ANDREW D. FESHBACH
----------------------
Andrew D. Feshbach
President and Chief Executive Officer
(Principal Executive Officer)
May 12, 2005 /s/ ROBERTA J. MORRIS
---------------------
Roberta J. Morris
Chief Financial Officer and Treasurer
(Principal Financial Officer)