-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SLC7xFfrm1F+7yZ4RUf4huky9oXO+8m4rfwKKioXvYWS1ZFtB9Z582oxCHShLP9O j8F4QvrfMLY0qt6PNSPbOA== 0001019439-03-000020.txt : 20031114 0001019439-03-000020.hdr.sgml : 20031114 20031113201014 ACCESSION NUMBER: 0001019439-03-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIG DOG HOLDINGS INC CENTRAL INDEX KEY: 0001019439 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [5651] IRS NUMBER: 521868665 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22963 FILM NUMBER: 031000042 BUSINESS ADDRESS: STREET 1: 121 GRAY AVENUE STREET 2: SUITE 300 CITY: SANTA BARBARA STATE: CA ZIP: 93101 BUSINESS PHONE: 8059638727 MAIL ADDRESS: STREET 1: 121 GRAY AVENUE STREET 2: SUITE 300 CITY: SANTA BARBARA STATE: CA ZIP: 93101 10-Q 1 form3q200310q.txt 3Q2003-10Q 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) EX-31 2 form3q2003ex31-1.txt FORM3Q2003EX31-1 EXHIBIT 31.1 CERTIFICATION I, Andrew Feshbach, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Big Dog Holdings, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))for the registrant and we have: a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and c) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information: b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 13, 2003 /s/ ANDREW D. FESHBACH ---------------------- Andrew D. Feshbach President and Chief Executive Officer EX-31 3 form3q2003ex31-2.txt FORM3Q2003EX31-2.TXT. EXHIBIT 31.2 CERTIFICATION I, Roberta Morris, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Big Dog Holdings, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))for the registrant and we have: a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and c) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information: b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 13, 2003 /s/ ROBERTA J. MORRIS --------------------- Roberta J. Morris Chief Financial Officer EX-32 4 form3q2003ex32.txt FORM3Q2003EX32.TXT EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Big Dog Holdings, Inc. and subsidiaries (the "Company") on Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), We, Andrew D.Feshbach, President and Chief Executive Officer of the Company and Robert J Morris, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to s.s. 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ANDREW D. FESHBACH /s/ROBERTA J. MORRIS - -------------------------------------- ---------------------------------- Andrew D. Feshbach Roberta J. Morris President and Chief Executive Officer Chief Financial Officer November 13, 2003 November 13, 2003 -----END PRIVACY-ENHANCED MESSAGE-----