-----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, MhBFOLrUtoQqtjUZ/NrnGBctDJ7ftHbsOrDH7H5h1Wf3lB2vm/R9vLug172lAKLf WpKcLxKKwYF6eWhmDYfeAw== 0001019439-04-000044.txt : 20041115 0001019439-04-000044.hdr.sgml : 20041115 20041112185258 ACCESSION NUMBER: 0001019439-04-000044 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041112 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: 041141185 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 form3g200410qfinaldraft.txt FORM 3Q 2004-10Q FINAL DRAFT 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, 2004 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 November 12, 2004 was 9,173,032 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, 2004 and December 31, 2003....................3 CONSOLIDATED STATEMENTS OF OPERATIONS Three and nine months ended September 30, 2004 and 2003.... 4 CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 2004 and 2003.............. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................. 7 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................. 13 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........................... 20 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 20 ITEM 5: OTHER INFORMATION......................................... 20 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.......................... 20 SIGNATURES.................................................................. 21 PART 1. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) BIG DOG HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) September 30, December 31, 2004 2003 ----------------------- -------------------------- ASSETS (Notes 2 and 3) CURRENT ASSETS: Cash and cash equivalents $2,330,000 $ 10,503,000 Receivables, net 403,000 116,000 Inventories, net 51,791,000 24,752,000 Prepaid expenses and other current assets 1,214,000 789,000 Deferred income taxes 1,287,000 875,000 ----------------------- -------------------------- Total current assets 57,025,000 37,035,000 PROPERTY AND EQUIPMENT, Net 10,520,000 4,144,000 INTANGIBLE ASSETS, Net 172,000 211,000 DEFERRED INCOME TAXES 1,292,000 946,000 OTHER ASSETS 420,000 246,000 ----------------------- -------------------------- TOTAL $ 69,429,000 $ 42,582,000 ======================= ========================== LIABILITIES AND STOCKHOLDERS' EQUITY (Notes 2 and 3) Short-term borrowings $ 15,628,000 $ - Current portion of long-term debt 272,000 - Accounts payable 7,720,000 1,932,000 Income taxes payable 452,000 1,513,000 Accrued expenses and other current liabilities 4,963,000 4,016,000 ----------------------- -------------------------- Total current liabilities 29,035,000 7,461,000 NOTE PAYABLE 530,000 - CAPITAL LEASE OBLIGATIONS 298,000 - DEFERRED RENT 953,000 606,000 DEFERRED GAIN ON SALE-LEASEBACK 261,000 301,000 ----------------------- -------------------------- Total liabilities 31,077,000 8,368,000 ---------------------- ---------------------- 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, 10,703,030 and 9,698,284 issued at September 30, 2004 and December 31, 2003, respectively 107,000 97,000 Additional paid-in capital 25,473,000 20,510,000 Retained earnings 21,000,000 21,461,000 Treasury stock, 1,529,998 and 1,455,152 shares at September 30, 2004 and December 31, 2003, respectively (8,228,000) (7,854,000) ----------------------- -------------------------- Total stockholders' equity 38,352,000 34,214,000 ----------------------- -------------------------- TOTAL $ 69,429,000 $ 42,582,000 ======================= ========================== 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, ------------------------------------------- -------------------------------------------- 2004 2003 2004 2003 -------------------- ------------------- -------------------- ------------------- NET SALES $42,695,000 $29,487,000 $105,619,000 $69,049,000 COST OF GOODS SOLD 19,262,000 12,658,000 47,934,000 29,899,000 -------------------- ------------------- -------------------- ------------------- GROSS PROFIT 23,433,000 16,829,000 57,685,000 39,150,000 -------------------- ------------------- -------------------- ------------------- OPERATING EXPENSES: Selling, marketing and distribution 19,363,000 12,390,000 52,371,000 35,584,000 General and administrative 1,811,000 1,189,000 5,544,000 3,723,000 -------------------- ------------------- -------------------- ------------------- Total operating expenses 21,174,000 13,579,000 57,915,000 39,307,000 -------------------- ------------------- -------------------- ------------------- INCOME (LOSS) FROM OPERATIONS 2,259,000 3,250,000 (230,000) (157,000) OTHER INCOME - - (82,000) (1,000) INTEREST EXPENSE 187,000 75,000 594,000 240,000 -------------------- ------------------- -------------------- ------------------- INCOME (LOSS) BEFORE BENEFIT FOR INCOME TAXES 2,072,000 3,175,000 (742,000) (396,000) PROVISION (BENEFIT) FOR INCOME TAXES 788,000 1,228,000 (281,000) (151,000) -------------------- ------------------- -------------------- ------------------- NET INCOME (LOSS) $ 1,284,000 $ 1,947,000 $ (461,000) $ (245,000) ==================== =================== ==================== =================== NET INCOME (LOSS) PER SHARE: BASIC $ 0.14 $ 0.24 $ (0.05) $ (0.03) ==================== =================== ==================== =================== DILUTED $ 0.13 $ 0.24 $ (0.05) $ (0.03) ==================== =================== ==================== =================== WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC 9,189,000 8,264,000 8,568,000 8,328,000 ==================== =================== ==================== =================== DILUTED 9,633,000 8,265,000 8,568,000 8,328,000 ==================== =================== ==================== ===================
See notes to the consolidated financial statements. BIG DOG HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine months ended September 30, ------------------------------------------ 2004 2003 --------------------- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (461,000) $ (245,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,672,000 1,613,000 Compensation expense 328,000 - Gain on early extinguishment of notes payable (82,000) - Amortization of deferred financing fees 192,000 114,000 Provision for losses on receivables 94,000 (24,000) Loss on disposition of property and equipment 51,000 3,000 Deferred income taxes (758,000) 32,000 Changes in operating assets and liabilities: Receivables (380,000) 226,000 Inventories (14,285,000) (8,511,000) Prepaid expenses and other assets 1,215,000 (781,000) Accounts payable 3,995,000 2,462,000 Income taxes payable (1,061,000) (555,000) Accrued expenses and other current liabilities (4,391,000) (1,580,000) Deferred rent 347,000 (66,000) Deferred gain on sale-leaseback (40,000) (40,000) ---------------------- ---------------------- Net cash used in operating activities (12,564,000) (7,352,000) ---------------------- ---------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,149,000) (733,000) Acquisition of The Walking Company, net of cash acquired (1,577,000) - ---------------------- ---------------------- Net cash used in investing activities (2,726,000) (733,000) ---------------------- ---------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit agreement 7,994,000 2,873,000 Repayment of redeemable convertible notes and rights (363,000) - Repurchase of common stock (374,000) (406,000) Exercise of stock options 42,000 - Repayment of capital lease obligations (182,000) - ---------------------- ---------------------- Net cash provided by financing activities 7,117,000 2,467,000 ---------------------- ---------------------- NET DECREASE IN CASH (8,173,000) (5,618,000) CASH, BEGINNING OF PERIOD 10,503,000 6,194,000 ---------------------- ---------------------- CASH, END OF PERIOD $ 2,330,000 $ 576,000 ====================== ======================
See notes to the consolidated financial statements. BIG DOG HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine months ended September 30, ----------------------------------------------- 2004 2003 ---------------------- ---------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest $ 417,000 $ 239,000 Income taxes $ 1,539,000 $ 373,000 SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING ACTIVITIES: ACQUISITION OF THE WALKING COMPANY: Working capital, other than cash $(327,000) Properties 7,583,000 Redeemable convertible notes and rights assumed (4,998,000) Notes payable (681,000) ---------------------- Net cash effect due to acquisition of net assets of The Walking $ 1,577,000 Company ====================== REDEMPTION OF NOTES AND RIGHTS: Redeemable convertible notes and rights assumed $ 4,998,000 Expiration of warrants 328,000 Accrued interest 75,000 Amortization of premium on convertible notes (25,000) Gain on early extinguishment of debt (82,000) Issuance of 993,146 shares of common stock (4,931,000) ---------------------- Net cash effect due to redemption of notes and rights $ 363,000 ====================== OTHER: Capital leases $ 367,000 ======================
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 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. The interim financial statements for the nine months ended September 30, 2004 contain the results of operations since March 3, 2004, of the Company's acquisition of primarily all the assets of The Walking Company. For a complete description of the acquisition see Note 2 below. In the opinion of management, all adjustments, consisting only of normal recurring entries necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. 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, 2003. 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 (subject to adjustment). 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 will be 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, $5.7 million in issuance of notes and rights, $15.0 million of assumption of accounts payable, accrued expenses and other liabilities (including acquisition related costs of $2.2 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. The purchase price allocation is subject to change and will be finalized upon review and refinement of certain estimates and completion of valuation and appraisals. Cash and cash equivalents. $ 123,000 Inventories 12,754,000 Other current assets 1,944,000 Property, plant and equipment 7,583,000 ------------ Total assets acquired $ 22,404,000 ------------ Current and other liabilities $ 15,025,000 Notes payable and rights issued 5,679,000 ------------ Total liabilities assumed $ 20,704,000 ------------ Net assets acquired over liabilities $ 1,700,000 ============ The following table presents unaudited pro forma results of the combined operations for the nine months ended September 30, 2004 and 2003, respectively, as if the acquisition had occurred as of the beginning of such periods rather than as of the acquisition date. Nine Months ended September 30, 2004 2003 ----------------------- ------------------------ Net sales $113,938,000 $115,140,000 Net loss (1,012,000) (2,135,000) Net loss per common share: Basic and diluted $ (0.12) $ (0.26)
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 on the dates specified. The results above are not necessarily indicative of the results that may be achieved in the future. These results also do not reflect any adjustments for the effect of certain operating synergies or expected cost reductions that the Company may realize as a result of the acquisition. No assurances can be given that the amount of financial benefits, if any, may actually be realized as the result of the acquisition. 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. 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% (4.50% at September 30, 2004), which is based on excess availability levels. As of September 30, 2004 and December 31, 2003, the Company had $11,797,000 and $0, respectively, outstanding under the Amended Credit Agreement. Additionally, the Company had $1,263,000 and $966,000, respectively, of letters of credit outstanding as of September 30, 2004 and December 31, 2003. The letters of credit expire through December 31, 2004. 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% (5.00% at September 30, 2004), which is based on excess availability levels. As of September 30, 2004, TWC had approximately $3,831,000 outstanding under this credit agreement and $85,000 of outstanding letters of credit. The letters of credit expire through December 31, 2004. 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. At September 30, 2004, the Company had no balance outstanding under this facility. 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 The Walking Company. 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 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, certain note holders 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 accompanying statement of operations. Note 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 claims 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 September 30, 2004, $97,000 of the priority tax claim note has been classified as current and is included in current portion of long-term debt in the accompanying consolidated balance sheet. Note 4. 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, ------------- ------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income (loss): As reported $ 1,284,000 $ 1,947,000 $(461,000) $(245,000) Add: Stock-based employee compensation expense included in reported net income (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................ (138,000) (133,000) (482,000) (475,000) ---------- ----------- ----------- ------------ Pro forma $ 1,146,000 $ 1,814,000 $ (829,000) $ (720,000) =========== =========== =========== ============ Net income (loss) per share: As reported: Basic................................. $ 0.14 $ 0.24 $ (0.05) $ (0.03) Diluted............................... $ 0.13 $ 0.24 $ (0.05) $ (0.03) Pro forma: Basic................................. $ 0.13 $ 0.22 $ (0.10) $ (0.09) Diluted............................... $ 0.12 $ 0.22 $ (0.10) $ (0.09) Antidilutive options..................... 1,518,000 1,719,000 -- --
NOTE 5. Stockholder's Equity In March 1998, the Company announced that it's Board authorized the repurchase of up to $10,000,000 of common stock. As of September 30, 2004, the Company had repurchased 1,529,998 shares totaling $8,228,000. 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 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 2004, the Company has operated its business reportable segments: (i) Big Dog Sportswear business and (ii) The Walking Company business. The Big Dog Sportswear business includes the Company's 188 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 73 Walking Company stores located primarily in leading retail malls. The accounting policies of the reportable segments are consistent with the consolidated financial statements of the Company. The Company evaluates individual store profitability in terms of a store's contribution which is defined as gross margin less direct selling, occupancy, and certain indirect selling costs. Below are the results of operations on a segment basis for the three and nine months ended September 30, 2004 (with The Walking Company's results being reported only for the period from the March 3, 2004 of acquisition date): Big Dog The Walking Sportswear Company Total -------------------- -------------------- --------------------- Statements of Income: Three months ended September 30, 2004 Sales $26,688,000 $16,007,000 $ 42,695,000 Gross Margin 15,472,000 7,961,000 23,433,000 Depreciation and Amortization 509,000 505,000 1,014,000 Interest expense 99,000 88,000 187,000 Provision for income taxes 898,000 (110,000) 788,000 Net Income 1,465,000 (181,000) 1,284,000 Nine months ended September 30, 2004 Sales $66,431,000 $39,188,000 $105,619,000 Gross Margin 38,183,000 19,502,000 57,685,000 Depreciation and Amortization 1,384,000 1,288,000 2,672,000 Interest expense 294,000 300,000 594,000 (Benefit) Provision for income taxes (234,000) (47,000) (281,000) Net Income (383,000) (78,000) (461,000) Balance Sheet: Total assets $44,777,000 $24,652,000 $ 69,429,000
NOTE 7. Recently Issued Accounting Standards 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 the Company's consolidated financial statements. 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 an impact on the Company's 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 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 will be effective for financial instruments entered into or modified after May 31, 2003 and otherwise will be 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 the Company's 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, 2003. 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, 2003 filed with the Securities and Exchange Commission. RESULTS OF OPERATIONS Three Months Ended September 30, 2004 and 2003 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 $42.7 million for the three months ended September 30, 2004 from $29.5 million for the same period in 2003, an increase of $13.2 million, or 44.8%. The increase was primarily related to $16.0 million in sales from the acquisition of The Walking Company on March 3, 2004. The increase was offset by $1.9 million attributable to a 7.0% decrease in comparable store sales for the period, $0.4 million attributable to a decrease in 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 wholesale business. The decrease in 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, which accounted for 2% of revenues in 2003. GROSS PROFIT. Gross profit increased to $23.4 million for the three months ended September 30, 2004 from $16.8 million for the same period in 2003, an increase of $6.6 million, or 39.3%. As a percentage of net sales, gross profit decreased to 54.9% in the three months ended September 30, 2004 from 57.1% for the same period in 2003. The decrease was attributable to the addition of The Walking Company store sales. Such decrease in margin is expected to continue for future periods, as The Walking Company margin contribution is generally lower than the Company's historical results. The Walking Company gross margin was 49.7% for the three months ended September 30, 2004 as compared to Big Dogs' contribution of 58.0%. The Big Dogs' gross profit for the three month period ended September 30, 2004 increased to 58.0% from 57.1% in the same period in 2003. The 0.9% increase was primarily due to a shift from promotional or lower-margined sales to higher-margined sales. Gross profit may not be comparable to those of other retailers, since some retailers include distribution costs and store occupancy costs in costs of goods sold, while we exclude them from gross margin, including them instead in selling, marketing and distribution expenses. SELLING, MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and distribution expenses consist of expenses associated with creating, distributing and selling products through all channels of distribution, including occupancy, payroll and catalog costs. Selling, marketing and distribution expenses increased to $19.4 million in the three months ended September 30, 2004 from $12.4 million for the same period for 2003, an increase of $7.0 million, or 56.5%. The $7.0 million increase is primarily due to $7.5 million related to The Walking Company. As a percentage of net sales, these expenses increased to 45.4% in the three months ended September 30, 2004 from 42.0% in the same period in 2003, an increase of 3.4%. The increase is related to the acquisition of The Walking Company, which has higher selling, marketing and distribution costs as a percentage of their revenue in the third quarter, and an increase in the Big Dogs' selling, marketing and distribution expenses as a percentage of net sales for the three month period ended September 30, 2004 compared to the same period in 2003 due to spreading the revenue over a lower 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 increased to $1.8 million for the three months ended September 30, 2004 from $1.2 million for the same period in 2003. The increase is directly attributable to The Walking Company acquisition. As a percentage of net sales, these expenses increased to 4.2% in the three months ended September 30, 2004 from 4.0% for the same period in 2003. INTEREST EXPENSE. Interest expense increased to $0.2 million for the three month period ended September 30, 2004 from $0.1 million for the same period in 2003. The increase in interest expense is due to higher average outstanding borrowings. Such increase in interest expense is expected to increase in future periods as a result of The Walking Company acquisition. INCOME TAXES. The Company recorded an income tax expense at its historical effective income tax rate of 38.0%. Nine Months Ended September 30, 2004 and 2003 NET SALES. Net sales increased to $105.6 million for the nine months ended September 30, 2004 from $69.1 million for the same period in 2003, an increase of $36.5 million, or 52.8%. The increase was primarily related to $39.2 million in sales from the acquisition of The Walking Company on March 3, 2004. This increase was offset by $0.9 million attributable to a decrease in comparable store sales of 1.5%, $0.7 million attributable to a decrease in 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 $1.1 million attributable to a decrease in the Company's wholesale business. The decrease in comparable store sales is primarily related to an overall decrease in consumer traffic in our stores and outlet locations. During the second quarter, the Company closed its wholesale division, which accounted for 2% of revenues in 2003. GROSS PROFIT. Gross profit increased to $57.7 million for the nine months ended September 30, 2004 from $39.2 million for the same period in 2003, an increase of $18.5 million, or 47.2%. As a percentage of net sales, gross profit decreased to 54.6% in the nine months ended September 30, 2004 from 56.7% for the same period in 2003. The decrease was attributable to the addition of The Walking Company store sales as of the acquisition date of March 3, 2004. Such decrease in margin is expected to continue for future periods, as The Walking Company margin contribution is generally lower than the Company's historical results. The Walking Company gross margin was 49.8% for the period ended September 30, 2004 as compared to Big Dogs' contribution of 57.5%. The Big Dogs' gross profit for the nine month period ended September 30, 2004 increased to 57.5% from 56.7% in the same period in 2003. The 0.8% increase was primarily due to a shift from promotional or lower-margined sales to higher-margined sales. Gross profit may not be comparable to those of other retailers, since some retailers include distribution costs and store occupancy costs in costs of goods sold, while we exclude them from gross margin, including them instead in selling, marketing and distribution expenses. SELLING, MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and distribution expenses increased to $52.4 million in the nine months ended September 30, 2004 from $35.6 million for the same period for 2003, an increase of $16.8 million, or 47.2%. The $16.8 million increase is primarily due to $17.6 million related to The Walking Company. As a percentage of net sales, these expenses decreased to 49.6% in the nine months ended September 30, 2004 from 51.5% in the same period in 2003, a decrease of 1.9%. The decrease as a percentage of sales is primarily related to cost reductions related to store closures and synergies created as a result of the acquisition of The Walking Company. Due to the acquisition, this decrease in expenses as a percentage of revenue, as compared to last years percentage is expected to continue in future periods. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $5.5 million for the nine months ended September 30, 2004 from $3.7 million for the same period in 2003. The increase is directly attributable to The Walking Company acquisition. As a percentage of net sales, these expenses decreased to 5.2% in the nine months ended September 30, 2004 from 5.4% for the same period in 2003. OTHER INCOME. Other income of $0.1 million in 2004 is the discount from early debt extinguishment of the redeemable convertible notes related to The Walking Company acquisition. INTEREST EXPENSE. Interest expense increased to $0.6 million for the nine month period ended September 30, 2004 from $0.2 million for the same period in 2003. The increase in interest expense is due to higher average outstanding borrowings. Such increase in interest expense is expected to increase 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 fourth quarter as discussed in "Seasonality" below. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 30, 2004, the Company's primary uses of cash were for merchandise inventories, the acquisition of The Walking Company, 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 $12.6 million and $7.4 million for the nine months ended September 30, 2004 and 2003, respectively. The increase in cash used in operating activities is principally due to an increase in merchandise inventory. Cash used in investing activities was $2.7 million and $0.7 million for the nine months September 30, 2004 and 2003, 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 $7.1 million in the nine months ended September 30, 2004 compared to $2.5 million in the same period in 2003. As of September 30, 2004 the Company had short term borrowings of $15.6 million under its borrowing agreements. As of September 30, 2003 the Company had short term borrowings of $2.9 million. 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% (4.50% at September 30, 2004), which is based on excess availability levels. As of September 30, 2004 and December 31, 2003, the Company had $11,797,000 and $0, respectively, outstanding under the Amended Credit Agreement. Additionally, the Company had $1,263,000 and $966,000, respectively, of letters of credit outstanding as of September 30, 2004 and December 31, 2003. The letters of credit expire through December 31, 2004. 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% (5.00% at September 30, 2004), which is based on excess availability levels. As of September 30, 2004, TWC had approximately $3,831,000 outstanding under this credit agreement and $85,000 of outstanding letters of credit. The letters of credit expire through December 31, 2004. 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. At September 30, 2004, no amounts were outstanding under this facility. 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 The Walking Company. 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 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, certain note holders 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 accompanying statement of operations. 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 claims 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 September 30, 2004, $97,000 of the priority tax claim note has been classified as current and is included in current portion of long-term debt in the accompanying consolidated balance sheet. 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, 2003. COMMITMENTS AND OBLIGATIONS As of September 30, 2004, we had the following obligations, net of interest: Total Amounts Less than 1 1 to 3 4 to 5 Committed year years years Over 5 years ----------------- --------------- --------------- --------------- ----------------- Debt: Revolving lines of credit $ 15,628,000 $15,628,000 $ - $ - $ - Priority tax claims 627,000 97,000 265,000 265,000 - Contractual Obligations: Operating leases 86,512,000 22,593,000 34,183,000 18,421,000 11,315,000 Capital leases 473,000 175,000 293,000 5,000 - Other Commercial Commitments: Letters of credit 983,000 983,000 - - - Standby letters of credit 365,000 365,000 - - - ----------------- --------------- --------------- --------------- ----------------- Total Commitments $104,588,000 $39,841,000 $34,741,000 $18,691,000 $11,315,000 ----------------- --------------- --------------- --------------- -----------------
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 September 30, 2004, 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 In connection with the March 3, 2004 acquisition of the assets of The Walking Company, former creditors of The Walking Company received rights to convert certain promissory notes issued by TWC into common stock of the Company. See ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES, above. Such securities were issued without registration under the Securities Act of 1933 pursuant the exemption under Section 1145(a) of the federal Bankruptcy Code. As of September 30, 2004, 993,146 shares were issued as a result of these rights. In addition, in July, 2004 the Company repurchased 74,846 shares of its common stock. Total Number of Shares Purchased Dollar as Part Value that Total Average of May Yet be Number of Price Publicly Purchased Shares Paid per Announced Under the Purchased Share Plan Plan (1) ---------------- ------------- -------------- --------------- 7/1/2004 - 7/31/2004 74,846 $ 5.00 1,529,998 $1,772,000 8/1/2004 - 8/31/2004 - - 1,529,998 1,772,000 9/1/2004 - 9/30/2004 - - 1,529,998 1,772,000
(1) In March 1998, the Company announced that its Board authorized the repurchase of up to $10,000,000 of its common stock. The plan does not have a termination date. ITEM 3: DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5: OTHER INFORMATION Not applicable ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K On October 1, 2004 and on October 12, 2004 the Company filed a Form 8-K and a Form 8-K/A to disclose the replacement of their independent accountants. On November 9, 2004 the Company filed an 8-K to disclose third quarter 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. November 12, 2004 /s/ ANDREW D. FESHBACH ---------------------- Andrew D. Feshbach President and Chief Executive Officer (Principal Executive Officer) November 12, 2004 /s/ ROBERTA J. MORRIS --------------------- Roberta J. Morris Chief Financial Officer and Treasurer (Principal Financial Officer) Chief Executive Officer Certification I, Andrew D. Feshbach, President and Chief Executive Officer of Big Dog Holdings, Inc., certify that: 1. I have reviewed this report on Form 10-Q of Big Dog Holdings, Inc., (the "Registrant"); 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 and 15d-15e) for the Registrant and 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 report is being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report b 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 evaluation; and c. disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant fourth 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 auditors and the audit committee of 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 controls over a financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. Dated: November 12, 2004 By /s/ ANDREW D. FESHBACH ------------------------- Andrew D. Feshbach President and Chief Executive Officer ChieI Financial Officer Certification I, Roberta J. Morris, Chief Financial Officer of Big Dog Holdings, Inc.,certify that: 1. I have reviewed this report on Form 10-Q of Big Dog Holdings, Inc., (the "Registrant"); 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 and 15d-15e) for the Registrant and 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 a consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report b 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 evaluation; and c. disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant fourth 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 auditors and the audit committee of 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 controls over a financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. Dated: November 12, 2004 By /s/ ROBERTA J. MORRIS ------------------------ Roberta J. Morris Chief Financial Officer EX-32.1 2 form3q2004ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 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 quarter ended September 30, 2004 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 Roberta 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 12, 2004 November 12, 2004 -----END PRIVACY-ENHANCED MESSAGE-----