Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-97565
PROSPECTUS
PETMED EXPRESS, INC.
12,590,985 Shares of Common stock
Since the effective date of the registration statement relating
to the resale of 14,441,932 shares of our common stock, 1,652,633
shares of our common stock covered by the registration statement
have been sold and warrants convertible into 198,314 shares of
our common stock have expired. Accordingly, this prospectus
relates to the resale of the remaining shares up to 12,590,985
shares of our common stock that may be offered and sold from time
to time by selling shareholders, consisting of:
* 9,845,985 shares; and
* 2,745,000 shares issuable upon exercise of warrants and
non-plan stock options.
We will not receive any of the proceeds for shares sold by the
selling shareholders.
Our common stock is traded on the OTCBB under the trading symbol
"PETS". The closing sales price for our common stock on August
12, 2003 was $7.83 per share.
The securities offered hereby involve a high degree of risk.
See "RISK FACTORS" beginning on page 3.
These securities have not been approved or disapproved by the
Securities and Exchange Commission or any state securities
commission nor has the Securities and Exchange Commission or any
state securities commission passed upon the accuracy or adequacy
of this prospectus. Any representation to the contrary is a
criminal offense.
The original date of this prospectus was August 12, 2002
The date of this prospectus is September 16, 2003
PROSPECTUS SUMMARY
The Company
PetMed Express, Inc., d/b/a 1-800-PetMeds, is a leading
nationwide pet pharmacy. We market prescription and non-
prescription pet medications along with health and nutritional
supplements for dogs and cats direct to the consumer. We offer
consumers an attractive alternative for obtaining pet medications
in terms of convenience, price, and speed of delivery. We market
our products through national television, on-line and direct mail
advertising campaigns, which aim to increase the recognition of
the "1-800-PetMeds" brand name, increase traffic on our web site
at www.1800PetMeds.com, acquire new customers, and maximize
repeat purchases.
Our fiscal year end is March 31, and our executive offices are
located at 1441 S.W. 29th Avenue, Pompano Beach, Florida 33069.
Our telephone number is (954) 979-5995; our facsimile number is
(954) 971-0544.
Unless otherwise indicated, references throughout this prospectus
to "PetMed Express," "1-800-PetMeds," "PetMed Express.com," "1-
888-PetMeds," "the Company," "we," "us" and "our" refer to PetMed
Express, Inc., a Florida corporation and its subsidiaries.
The Offering and Our Securities
This prospectus covers the resale of a total of 12,590,985 shares
of common stock by the selling shareholders identified in this
prospectus. The shares of common stock are underlying certain
warrants and options not issued under our 1998 Stock Option Plan.
Prior to this offering, there were 19,349,458 shares of our
common stock issued and outstanding. If all of the shares covered
by this prospectus are sold, there will be 22,094,458 shares of
our common stock issued and outstanding. In addition to the
shares covered by this prospectus, we have reserved a total of
2,077,603 shares in the event of conversion of outstanding
preferred stock and exercise of options under our stock option
plan and outstanding warrants.
Summary Financial Data
The following summary of our financial information has been
derived from our financial statements that are included elsewhere
in this prospectus. The information for the years ended March
31, 2003, 2002 and 2001 is derived from our audited financial
statements. The information for the three months ended June 30,
2003 and 2002 is derived from our unaudited financial statements
and is not necessarily indicative of the results that may be
expected for the entire fiscal year ending March 31, 2004. The
data set forth below should be read in conjunction with the
financial statements and notes thereto included elsewhere in this
prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Note that current
financial condition is not indicative of future results.
2
STATEMENTS OF OPERATIONS
Year Ended March 31, Three Months Ended June 30,
------------------------------------------ ---------------------------
2003 2002 2001 2003 2002
------------ ------------ ------------ ------------ ------------
Sales $ 54,974,916 $ 32,025,931 $ 10,006,285 $ 30,387,563 $ 14,830,755
Cost of sales 31,517,639 18,894,493 6,367,604 18,582,680 8,568,253
Gross profit 23,457,277 13,131,438 3,638,681 11,804,883 6,262,502
Operating expenses 19,974,270 12,383,498 6,277,779 9,657,595 4,971,267
Net income (loss) 3,257,565 825,413 (2,826,707) 1,432,584 902,329
Net income (loss) per
common share:
Basic 0.19 0.05 (0.28) 0.08 0.05
Diluted 0.16 0.04 (0.28) 0.06 0.04
Weighted average number of
common shares outstanding:
Basic 17,300,130 16,360,010 9,943,625 19,010,438 16,590,779
Diluted 20,749,515 19,739,493 9,943,625 23,012,611 20,092,544
BALANCE SHEET DATA
March 31, June 30,
------------------------------------------ ---------------------------
2003 2002 2001 2003 2002
------------ ------------ ------------ ------------ ------------
Working capital (deficit) $ 3,017,641 $ 690,588 $ (2,473,349) $ 5,564,699 $ 1,503,010
Total assets 9,025,796 4,654,236 4,504,757 12,831,377 6,429,750
Total liabilities 3,433,108 3,071,536 3,747,470 4,620,302 3,785,721
Shareholders' equity 5,592,688 1,582,700 757,287 8,211,075 2,644,029
RISK FACTORS
An investment in our common stock is highly speculative. You
should be aware you could lose the entire amount of your
investment. Prior to making an investment decision, you should
carefully read this entire prospectus and consider the following
risk factors. The risks and uncertainties described below are not
the only ones we face. There may be additional risks and
uncertainties that are not known to us or that we do not consider
to be material at this time. If the events described in these
risks occur, our business, financial condition and results of
operations could be adversely affected. This prospectus contains
forward-looking statements that involve risks and uncertainties.
Our actual results may differ significantly from the results
discussed in the forward-looking statements. This section
discusses the business risk factors that might cause those
differences.
We have only recently attained profitability and there are no
assurances that we can sustain profitable operations in future
periods.
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While we reported net income of approximately $3,258,000 and
$825,000 for the years ended March 31, 2003 and 2002,
respectively, and $1,433,000 for the three months ended June 30,
2003, we reported a net loss of approximately $2,827,000 for the
year ended March 31, 2001 and have an accumulated deficit at June
30, 2003 of approximately $281,000. Our profitability during
fiscal 2003 is due in part to an increase in our revenues of
approximately $22,949,000, or approximately 72%, from fiscal
2002. There are no assurances we will continue to generate
revenues at this increased level, or that we will remain
profitable during fiscal 2004 and beyond.
3
We may fail to comply with various state regulations covering the
dispensing of prescription pet medications. We could be subject
to reprimands, sanctions, probations, fines, suspensions or the
loss of one or more of our pharmacy licenses.
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The sale and delivery of prescription pet medications is
generally governed by state laws and state regulations. Since our
pharmacy is located in the state of Florida, we are governed by
the laws and regulations of the state of Florida. Each
prescription pet medication sale we make is likely to be covered
by the laws of the state where the customer is located. The laws
and regulations relating to the sale and delivery of prescription
pet medications vary from state to state, but generally require
that prescription pet medications be dispensed with the
authorization from a prescribing veterinarian. Sales of
prescription medications represented approximately 29% and 34% of
our sales for the fiscal years ended March 31, 2003 and 2002,
respectively. To the extent that we are unable to maintain our
license with the Florida Board of Pharmacy as a community
pharmacy, or if we do not maintain the licenses granted by other
state boards, or if we become subject to actions by the FDA, or
other enforcement regulators, our distribution of prescription
medications to pet owners could cease. If we were unable to
distribute prescription pet medications our sales would decrease
and our financial condition and results of operations may be
materially adversely impacted, however we would focus more on the
sale of non-prescription pet medication which historically
represented approximately 70% of our sales.
While we make every effort to fully comply with the applicable
state rules and regulations, from time to time we have been the
subject of administrative complaints regarding the authorization
of prescriptions prior to shipment. In connection with various
complaints filed against us with the Florida Board of Pharmacy,
in April 2002 we entered into a settlement agreement with the
Florida Board of Pharmacy and, among other terms, our pharmacy
license was placed on probation for a period of three years. We
cannot assure you that we will not continue to be the subject of
administrative complaints in the future. We cannot guarantee you
that we will not be subject to reprimand, sanctions, probations,
or to fines, or that one or more of our pharmacy licenses may not
be suspended or revoked.
Our alternate veterinarian program was discontinued and was under
investigation by the Florida Board of Pharmacy and Florida Agency
for Health Care Administration, and by various other state's
pharmacy boards, which could reduce or eliminate our ability to
verify certain prescriptions outside the state of Florida.
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We utilized the services of alternate veterinarians to verify
certain prescriptions for animals residing outside the state of
Florida. The alternate veterinarian was not the veterinarian who
had actually seen the animal and may reside in another state from
the animal. In February 2002, we voluntarily ceased the use of
the alternate veterinarian program, and in March 2002 a business
decision was made to enter into a settlement agreement with the
Florida Board of Pharmacy. Many of the complaints were for
prescriptions verified through our alternate veterinarian
program. The alternate veterinarian program used a veterinarian
outside the state of Florida to verify the prescription for
certain pets outside the state of Florida. The program was not
used for pets residing in the State of Florida. Future
complaints may be brought against us by states in which this
program was utilized. We are unable to assess the potential
impact on our business or any future penalties that may be
assessed from these or other complaints.
4
We currently purchase our prescription and non-prescription
medications from third party distributors and we are not an
authorized distributor of those products. We do not have any
guaranteed supply of these medications at any pre-established
prices.
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For the fiscal years ended March 31, 2003 and 2002, approximately
93% and 92%, respectively, of our sales were attributable to
sales of prescription and non-prescription medications.
Historically, substantially all the major pharmaceutical
manufacturers have declined to sell prescription and non-
prescription pet medications directly to us. In order to assure
a supply of these products, we purchase medications from various
secondary sources, including a variety of domestic distributors.
Our business strategy includes seeking to establish direct
purchasing arrangements with major pet pharmaceutical
manufacturing companies. If we were not successful in achieving
this goal, we would continue to rely upon distributors.
We cannot guarantee that if we continue to purchase prescription
and non-prescription pet medications from secondary sources that
we will be able to purchase an adequate supply to meet our
customers' demands, or that we will be able to purchase these
products at competitive prices. As these products represent a
significant portion of our sales, our failure to fill customer
orders for these products could adversely impact our sales. If
we should be forced to pay higher prices for these products to
ensure an adequate supply, we cannot guarantee that we will be
able to pass along to our customers any increases in the prices
we pay for these medications. This inability to pass along
increased prices would reduce our gross profit margins which
could materially adversely affect our results of operations.
Our failure to properly manage our inventory may result in
excessive inventory carrying costs, which could materially
adversely affect our financial condition and results of
operations.
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Our current product line contains approximately 600 SKUs in the
fiscal year ended March 31, 2003. A significant portion of our
sales is attributable to products representing approximately 90
SKUs. We need to properly manage our inventory to provide an
adequate supply of these products and avoid excessive inventory
of the products representing the balance of the SKUs. We
generally place orders for products with our suppliers based upon
our internal estimates of the amounts of inventory we will need
to fill future orders. These estimates may be significantly
different from the actual orders we receive. In the event that
subsequent orders fall short of original estimates, we may be
left with excess inventory. Significant excess inventory could
result in price discounts and increased inventory carrying costs.
Similarly, if we fail to have an adequate supply of some SKUs, we
may lose sales opportunities. We cannot guarantee that we will
maintain appropriate inventory levels. Any failure on our part
to maintain appropriate inventory levels may have a material
adverse effect on our financial condition and results of
operations.
Resistance from veterinarians to authorize prescriptions could
cause our sales to decrease and could materially adversely affect
our financial condition and results of operations.
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Since we began our operations, from time to time, some
veterinarians have resisted providing our customers with a copy
of their pet's prescription or authorizing the prescription to
our pharmacy staff, thereby effectively preventing us from
filling such prescriptions under state law. Sales of
prescription medications represented approximately 29% and 34% of
our sales for the fiscal years ended March 31, 2003 and 2002,
respectively. Although veterinarians in some states are required
by law to provide the pet owner with this prescription
information, if the number of veterinarians who refuse to
authorize prescriptions should increase, our sales could
decrease, our liquidity could be adversely affected and our
financial condition and results of operations may be materially
adversely impacted.
5
In the past we have purchased medications from international
distributors and we did not always know if those distributors had
the authority of the manufacturer to sell the products in the
United States. As a result, we may be subject to future civil or
administrative actions regarding those products.
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During fiscal 2002, a business decision was made to discontinue
purchasing any product from international distributors. We have
purchased a portion of our prescription and non-prescription
medications from international distributors in the past. These
medications may be trademarked and/or copyrighted products
manufactured in foreign countries or in the United States and
sold by the manufacturer to foreign distributors. Some of the
prescription and non-prescription medications may have been
manufactured by entities, particularly foreign licensees, who are
not the licensors or owners of the trademarks or copyrights for
the medications. From time to time, United States trademark and
copyright holders, their licensees, trade associations and the
United States Customs Service have brought forth litigation or
administrative agency proceedings in an attempt to halt the
importation or sale of trademarked and/or copyrighted products.
The courts remain divided on the extent to which trademark,
copyright or other laws, rules, regulations or decisions may
restrict the importation or sales of this merchandise without the
consent of the trademark or copyright owner.
There can be no assurance that future judicial, legislative or
administrative agency action, including possible import, export,
tariff or other trade restrictions, will not be brought against
us because of some of the secondary sources of supply used by us
in the past. Moreover, there can be no assurance that our past
business activities or merchandise sold to us in the past will
not become the subject of legal or administrative actions brought
by manufacturers, distributors, the United States Customs Service
or others. Any such judicial, legislative, administrative or
legal actions could result in substantial costs and diversion of
resources, and may adversely affect our business and operating
results by reducing our working capital available to operate our
business.
Significant portions of our sales are made to residents of seven
states. If we should lose our pharmacy license in one or more of
these states, our financial condition and results of operations
would be materially adversely affected.
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While we ship pet medications to customers in almost all 50
states, approximately 53% of our sales for the fiscal year ended
March 31, 2003 were made to customers located in the states of
California, Florida, Texas, New York, Georgia, Virginia and New
Jersey. Since we are dependent on sales in these states, if for
any reason our license to operate a pharmacy in one or more of
those states should be suspended or revoked, or if it is not
renewed, our financial condition and results of operations may be
materially adversely affected.
We face significant competition from veterinarians and
traditional and online retailers and may not be able to
profitably compete with them.
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We compete directly and indirectly with veterinarians in the sale
of pet medications and health and nutritional supplements.
Veterinarians hold a competitive advantage over us because many
pet owners may find it more convenient or preferable to purchase
these products directly from their veterinarians at the time of
an office visit. We also compete directly and indirectly with
both online and traditional retailers of pet medications and
health and nutritional supplements. Both online and traditional
retailers may hold a competitive advantage over us because of
longer operating histories, established brand names, greater
resources and an established customer base. Traditional
retailers may hold a competitive advantage over us because pet
owners may prefer to purchase these products from a store instead
of online or through traditional catalog/telephone methods. In
order to effectively compete in the future, we may be required to
offer promotions and other incentives, which may result in lower
operating margins or increased operating losses.
6
The content of our web site could expose us to various kinds of
liability, which, if prosecuted successfully, could negatively
impact our business.
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Because we post product information and other content on our web
site, we face potential liability for negligence, copyright
infringement, patent infringement, trademark infringement,
defamation and other claims based on the nature and content of
the materials we post. Various claims have been brought, and
sometimes successfully prosecuted, against Internet content
distributors. We could be exposed to liability with respect to
the unauthorized duplication of content. Although we maintain
general liability insurance, our insurance may not cover
potential claims of this type, or may not be adequate to
indemnify us for all liability that may be imposed. Any
imposition of liability that is not covered by insurance, or is
in excess of insurance coverage, could materially adversely
affect our financial condition and results of operations.
We may not be able to protect our intellectual property rights,
and we may be found to infringe on the proprietary rights of
others.
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We rely on a combination of trademark, trade secret, copyright
laws and contractual restrictions to protect our intellectual
property. These afford only limited protection. Despite our
efforts to protect our proprietary rights, unauthorized parties
may attempt to copy our non-prescription private label generic
equivalents, when and if developed, as well as aspects of our
sales formats, or to obtain and use information that we regard as
proprietary, including the technology used to operate our web
site, our content and our trademarks.
Litigation or proceedings before the United States Patent and
Trademark Office may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets and
domain names, and to determine the validity and scope of the
proprietary rights of others. Any litigation or adverse priority
proceeding could result in substantial costs and diversion of
resources, and may adversely affect our business and operating
results by reducing our working capital available to operate our
business.
We expect that participants in our markets will be increasingly
involved in infringement claims as the number of services and
competitors in our industry segment grows. Any claim, whether
meritorious or not, could be time consuming, result in costly
litigation, cause service upgrade delays or require us to enter
into royalty or licensing agreements. These royalty or licensing
agreements might not be available on terms acceptable to us or at
all.
If we are unable to protect our Internet domain name or to
prevent others from using names that are confusingly similar, our
business may be adversely impacted.
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Our Internet domain names, www.1800PetMeds.com,
www.1888PetMeds.com, www.petmedexpress.com, and www.petmeds.com
are critical to our brand recognition and our overall success.
If we are unable to protect these domain names, our competitors
could capitalize on our brand recognition. We are aware of
substantially similar domain names, including www.petmed.com,
used by competitors. Governmental agencies and their designees
generally regulate the acquisition and maintenance of domain
names. The regulation of domain names in the United States and
in foreign countries has changed, and may undergo further change
in the near future. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks
and similar proprietary rights is unclear. Therefore, we may not
be able to protect our own domain names, or prevent third parties
from acquiring domain names that are confusingly similar to,
infringe upon or otherwise decrease the value of our domain
names. In the event that we are unable to protect our own domain
names, or prevent third parties from acquiring domain names that
are confusingly similar to, infringe upon or otherwise decrease
the value of our domain names, we could lose customers and sales
which may adversely effect our results of operation.
7
Since all of our operations are housed in a single location, we
are more susceptible to business interruption in the event of
damage to or disruptions in our facility.
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Our headquarters and distribution center are located in the same
building in South Florida, and all of our shipments of products
to our customers are made from this sole distribution center. We
have no present plans to establish any additional distribution
centers or offices. Because we consolidate our operations in one
location, we are more susceptible to power and equipment
failures, and business interruptions in the event of fires,
floods and other natural disasters than if we had additional
locations. Furthermore, because we are located in South Florida,
which is a hurricane-sensitive area, we are particularly
susceptible to the risk of damage to, or total destruction of,
our headquarters and distribution center and surrounding
transportation infrastructure caused by a hurricane. We cannot
assure you that we are adequately insured to cover the amount of
any losses relating to any of these potential events, business
interruptions resulting from damage to or destruction of our
headquarters and distribution center; or interruptions or
disruptions to major transportation infrastructure or other
events that do not occur on our premises. The occurrence of any
of these events, depending upon how serious, could have a
material adverse effect on our business, financial condition,
results of operations and prospects.
The majority of our sales are seasonal and our operating results
are difficult to predict and may fluctuate.
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Because our operating results are difficult to predict, we
believe that quarter-to-quarter comparisons of our operating
results are not a good indication of our future performance. The
majority of our product sales is affected by the seasons, due to
the seasonality of mainly heartworm and flea and tick
medications. Industry seasonality trends, according to Fountain
Agricounsel LLC, Management Consultants to Agribusiness, are
divided into percentage of industry sales by quarter. For the
quarters ended March 31, June 30, September 30, and December 31
industry sales are 19%, 37%, 28%, and 16%, respectively.
In addition to the seasonality of our sales, our annual and
quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of
factors, many of which are out of our control. Factors that may
cause our operating results to fluctuate include:
* Our inability to obtain new customers at a reasonable cost,
retain existing customers, or encourage reorders;
* Our inability to increase the number of visitors to our web
site, or our inability to convert visitors to our web site
into customers;
* The mix of medications and other pet products sold by us;
* Our inability to manage inventory levels;
* Our inability to adequately maintain, upgrade and develop
our web site, the systems that we use to process customer
orders and payments, or our computer network;
* Increased competition within our market niche;
* Price competition;
* Increases in the cost of advertising;
* The amount and timing of operating costs and capital
expenditures relating to expansion of our product line or
operations; and
* Disruption of our toll-free telephone service, technical
difficulties, systems and Internet outages or slowdowns.
Any change in one or more of these factors could make it more
costly or difficult to conduct our business, which could have a
material adverse affect on our results of operations and
financial condition.
8
Our shares of common stock currently have a limited trading
market.
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Our shares of common stock are currently quoted on the OTC
Bulletin Board. Our shares of common stock currently have only a
limited trading market. As a result, you may find it difficult
to dispose of shares of our common stock and you may suffer a
loss of all or a substantial portion of your investment in our
common stock.
Our stock price fluctuates from time to time and may fall below
expectations of securities analysts and investors, and could
subject us to litigation, which may result in you suffering the
loss of your investment.
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The market price of our common stock may fluctuate significantly
in response to a number of factors, some of which are beyond our
control. These factors include:
* quarterly variations in operating results;
* changes in accounting treatments or principles;
* announcements by us or our competitors of new products and
services offerings, significant contracts, acquisitions or
strategic relationships;
* additions or departures of key personnel;
* any future sales of our common stock or other securities;
* stock m arket price and volume fluctuations of publicly-
traded companies; and
* general political, economic and market conditions.
It is likely that in some future quarter our operating results
may fall below the expectations of securities analysts and
investors, which could result in a decrease in the trading price
of our common stock. In the past, securities class action
litigation has often been brought against a company following
periods of volatility in the market price of its securities. We
may be the targets of similar litigation in the future.
Securities litigation could result in substantial costs and
divert management's attention and resources, which could
seriously harm our business and operating results.
The interests of our controlling shareholders could conflict with
those of our other shareholders.
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Tricon Holdings, LLC, ("Tricon") our principal shareholder, owns
and controls approximately 38.2% of our voting securities and
together with the exercise of 2,160,000 warrants, if such
warrants were exercised which there can be no assurance, would
own and control 44.4% of our voting securities. Our officers
and directors, together with our principal shareholder (excluding
the exercise of the warrants or options), own or control 49.6% of
our voting securities. These shareholders are able to influence
the outcome of shareholder votes, including votes concerning:
* the election of directors;
* amendments to our charter and by-laws; and
* the approval of significant corporate transactions such as
a merger or sale of our assets.
This controlling influence could have the effect of delaying or
preventing a change in control, even if many of our shareholders
believe it is in their best interest.
9
If the selling security holders all elect to sell their shares of
common stock at the same time, the market price of our shares may
decrease.
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It is possible that the selling securities holders will offer all
of the shares for sale. Further, because it is possible that a
significant number of shares could be sold at the same time
hereunder, the sale, or the possibility thereof, may have a
depressive effect on the market price of our stock.
We may issue additional shares of preferred stock that could
defer a change of control or dilute the interests of our common
shareholders. Our charter documents could defer a takeover
effort, which could inhibit your ability to receive an
acquisition premium for your shares.
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Our charter permits our board of directors to issue up to
5,000,000 shares of preferred stock without shareholder approval.
Currently there are 2,500 shares of our Convertible Preferred
Stock issued and outstanding. This leaves 4,997,500 shares of
preferred stock available for issuance at the discretion of our
board of directors. These shares, if issued, could contain
dividend, liquidation, conversion, voting or other rights which
could adversely affect the rights of our common shareholders and
which could also be utilized, under some circumstances, as a
method of discouraging, delaying or preventing our change in
control. Provisions of our articles of incorporation, bylaws and
Florida law could make it more difficult for a third party to
acquire us, even if many of our shareholders believe it is in
their best interest.
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements," which
include information relating to future events, future financial
performance, strategies, expectations, competitive environment,
regulation and availability of resources. These forward-looking
statements include, without limitation, statements regarding:
expectations as to operations and operational improvements;
expectations as to cost savings, revenue growth and earnings; the
time by which certain objectives will be achieved; estimates of
costs; expectations that claims, lawsuits, commitments,
contingent liabilities, or other matters will not have a material
adverse effect on our consolidated financial position, results of
operations or liquidity; statements concerning projections,
predictions, expectations, estimates or forecasts as to our
business, financial and operational results and future economic
performance; and statements of management's goals and objectives
and other similar expressions concerning matters that are not
historical facts. Words such as "may," "will," "should," "could,"
"would," "predicts," "potential," "continue," "expects,"
"anticipates," "future," "intends," "plans," "believes,"
"estimates" and similar expressions, as well as statements in
future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of
future performance or results, and will not necessarily be
accurate indications of the times at, or by which, such
performance or results will be achieved. Forward-looking
information is based on information available at the time and/or
management's good faith belief with respect to future events, and
is subject to risks and uncertainties that could cause actual
performance or results to differ materially from those expressed
in the statements. Important factors that could cause such
differences include, but are not limited to: whether we are fully
successful in implementing our financial and operational
initiatives; industry competition, conditions, performance and
consolidation; legislative and/or regulatory developments; the
effects of adverse general economic conditions, both within the
United States and globally; any adverse economic or operational
repercussions from recent terrorist activities, any government
response thereto and any future terrorist activities, war or
other armed conflicts; the outcome of claims and litigation;
natural events such as severe weather, floods and hurricanes; and
other factors described under "Risk Factors."
10
Forward-looking statements speak only as of the date the
statements are made. We assume no obligation to update forward-
looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting forward-looking
information except to the extent required by applicable
securities laws. If we do update one or more forward-looking
statements, no inference should be drawn that we will make
additional updates with respect thereto or with respect to other
forward-looking statements. For any forward-looking statements
contained in this prospectus, we claim protection of the safe
harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
CAPITALIZATION
The following table sets forth our capitalization as of June 30,
2003. The table should be read in conjunction with our
consolidated financial statements and related notes included
elsewhere in this prospectus. The table does not give effect to:
* the issuance of 208,581 shares subsequent to June 30, 2003
through August 12, 2003;
* the issuance of up to 2,214,101 shares in the event
outstanding options that have been granted are exercised;
or
* the issuance of up to 2,775,000 shares in the event that
outstanding common stock purchase warrants are exercised.
June 30,
2003
----------
Long-term debt $ 51,332
Shareholders' equity:
Common stock, $.001 par value, 40,000,000
shares authorized, 19,140,877 shares
issued and outstanding 19,141
Preferred stock, $.001 par value, 5,000,000
shares authorized, 2,500 shares issued and
outstanding 8,898
Additional paid-in capital 8,464,330
Accumulated deficit (281,294)
----------
Total shareholders' equity 8,211,075
Total capitalization 8,262,407
==========
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of
common stock by the selling shareholders. If, and when, the
warrants and non-plan options are exercised by the selling
shareholders, the proceeds of $950,850 from the exercise shall be
used by us for general corporate purposes.
11
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common shares are traded on the OTC Bulletin Board under the
symbol "PETS". The prices set forth below reflect the range of
high and low closing prices per share in each of the quarters of
fiscal 2003 and 2002, and the first quarter of fiscal 2004 as
reported by the OTCBB.
Fiscal 2004: High Low
------------ ---- ---
First Quarter $5.00 $2.27
Fiscal 2003: High Low
------------ ---- ---
First Quarter $1.75 $0.76
Second Quarter $2.53 $1.75
Third Quarter $2.30 $1.57
Fourth Quarter $2.36 $1.78
Fiscal 2002: High Low
------------ ---- ---
First Quarter $2.11 $0.88
Second Quarter $1.45 $0.64
Third Quarter $1.15 $0.65
Fourth Quarter $1.25 $0.76
As of August 12, 2003, we had approximately 75 shareholders of
record, and we estimate there were approximately 950 beneficial
shareholders on that date. On August 12, 2003, the closing sales
price of the common stock as reported on the OTCBB was $7.83 per
share.
Holders of our common stock are entitled to cash dividends when,
and as may be declared by the board of directors. We have never
paid cash dividends on our common stock. We do not intend to pay
any dividends in the foreseeable future and investors should not
rely on an investment in us if they require dividend income. We
intend to retain earnings, if any, to finance the expansion of
our business. Future dividend policy will be subject to the
discretion of our board of directors and will be based upon
future earnings, if any, our financial condition, capital
requirements, general business conditions and other factors.
There can be no assurance that cash dividends of any kind will
ever be paid.
A special note about penny stock rules
--------------------------------------
Our common stock may be covered by an SEC rule that imposes
additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and
accredited investors, which are generally institutions with
assets in excess of $5,000,000, or individuals with net worth in
excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouse. For transactions covered by
the rule, the broker-dealer must make a special suitability
determination for the purchaser and transaction prior to the
sale. Consequently, the rule may affect the ability of broker-
dealers to sell our securities, and also may affect the ability
of purchasers of our stock to sell their shares in the secondary
market. It may also cause fewer broker-dealers to be willing to
make a market in our common stock, and it may affect the level of
news coverage we receive.
12
SELECTED FINANCIAL DATA
The following selected financial data should be read together
with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements
and notes thereto and other financial information included
elsewhere in this prospectus.
The consolidated statements of operations data set forth below
for the fiscal years ended March 31, 2003, 2002 and 2001 and the
consolidated balance sheet data as of March 31, 2003 and 2002
have been derived from our audited consolidated financial
statements which are included elsewhere in this prospectus. The
consolidated statements of operations data set forth below for
the three months ended June 30, 2003 and 2002 and the
consolidated balance sheet data as of June 30, 2003 has been
derived from our unaudited condensed consolidated financial
statements which are included elsewhere in this prospectus.
The consolidated statement of operations data set forth below for
the fiscal years ended March 31, 2000 and 1999 and the
consolidated balance sheet data as of March 31, 2001, 2000 and
1999 have been derived from our audited consolidated financial
statements which are not included in this prospectus. The
consolidated balance sheet data as of June 30, 2002 has been
derived from our unaudited condensed consolidated financial
statements which are not included in this prospectus.
STATEMENTS OF OPERATIONS
Year Ended March 31, Three Months Ended June 30,
------------------------------------------------------------------------ ---------------------------
2003 2002 2001 2000 1999 2003 2002
------------ ------------ ------------ ------------ ------------ ------------ ------------
Sales $ 54,974,916 $ 32,025,931 $ 10,006,285 $14,667,146 $ 10,224,178 $ 30,387,563 $ 14,830,755
Cost of sales 31,517,639 18,894,493 6,367,604 8,496,316 6,120,584 18,582,680 8,568,253
Gross profit 23,457,277 13,131,438 3,638,681 6,180,830 4,103,594 11,804,883 6,262,502
Operating expenses 19,974,270 12,383,498 6,277,779 7,766,385 3,876,183 9,657,595 4,971,267
Net income (loss) 3,257,565 825,413 (2,826,707) (1,794,237) (468,389) 1,432,584 902,329
Net income (loss) per
common share:
Basic 0.19 0.05 (0.28) (0.28) (0.09) 0.08 0.05
Diluted 0.16 0.04 (0.28) (0.28) (0.09) 0.06 0.04
Weighted average number of
common shares outstanding:
Basic 17,300,130 16,360,010 9,943,625 6,369,822 5,333,355 19,010,438 16,590,779
Diluted 20,749,515 19,739,493 9,943,625 6,369,822 5,333,355 23,012,611 20,092,544
BALANCE SHEET DATA
March 31, June 30,
------------------------------------------------------------------------ ---------------------------
2003 2002 2001 2000 1999 2003 2002
------------ ------------ ------------ ------------ ------------ ------------ ------------
Working capital (deficit) $ 3,017,641 $ 690,588 $ (2,473,349) $ 398,218 $ 2,037,732 $ 5,564,699 $ 1,503,010
Total assets 9,025,796 4,654,236 4,504,757 6,326,435 5,628,871 12,831,377 6,429,750
Total liabilities 3,433,108 3,071,536 3,747,470 4,695,583 2,917,930 4,620,302 3,785,721
Shareholders' equity 5,592,688 1,582,700 757,287 1,630,852 2,710,941 8,211,075 2,644,029
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Overview
PetMed Express was incorporated in the state of Florida in
January 1996. We began selling pet medications and products in
September 1996, and in the fall of 1997 we issued our first
catalog. This catalog displayed approximately 1,200 items,
including prescription and non-prescription pet medications, pet
health and nutritional supplements and pet accessories. In
fiscal 2001, we focused our product line to approximately 600 of
the most popular pet medications and health and nutritional
supplements for dogs and cats. We also market products on our web
site, where we currently generate approximately 50% of all sales,
over the previous 12 months we generated 44% of all sales. Since
October 1997, we have advertised our products on national
television, on-line, and direct mail advertising.
Our sales consist of products sold to mainly retail consumers and
minimal wholesale customers. Typically, our retail customers pay
by credit card or check at the time the order is shipped. We
usually receive cash settlement in one to three banking days for
sales paid for by credit cards, which minimizes the accounts
receivable balances relative to our sales. Certain wholesale
customers are extended credit terms, which usually require
payment within 30 days of delivery. For the three months ended
June 30, 2003 and 2002, our sales returns average was
approximately 1.3% and 2.0% of sales, respectively, and the
twelve month average purchase was approximately $71.
The following should be read in conjunction with our Consolidated
Financial Statements and the related notes thereto included
elsewhere herein.
Cautionary Factors That May Affect Future Results
This document and other documents we may file with the Securities
and Exchange Commission contain forward-looking statements. Also,
our management may make forward-looking statements orally to
investors, analysts, the media and others.
Forward-looking statements express our expectations or
predictions of future events or results. They are not guarantees
and are subject to many risks and uncertainties. There are a
number of factors, many beyond our control that could cause
actual events or results to be significantly different from those
described in the forward-looking statement. Any or all of our
forward-looking statements in this prospectus or in any other
report or public statements we make may turn out to be wrong.
Forward-looking statements can be identified by the fact that
they do not relate strictly to historical or current facts. They
use words such as "anticipate", "estimate", "expect", "project",
"intend", "plan", "believe" or words of similar meaning. They may
also use words such as "will", "would", "should", "could" or
"may."
Factors that may cause actual results to differ materially
include the risks discussed below, as well as the risks discussed
elsewhere in this prospectus under the caption "Risk Factors."
14
Critical Accounting Policies
Our discussion and analysis of our financial condition and the
results of our operations are based upon our condensed
consolidated financial statements and the data used to prepare
them. Our condensed consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America. On an ongoing basis we
re-evaluate our judgments and estimates including those related
to product returns, bad debts, inventories, long-lived assets,
income taxes, litigation and contingencies. We base our
estimates and judgments on our historical experience, knowledge
of current conditions and our beliefs of what could occur in the
future considering available information. Actual results may
differ from these estimates under different assumptions or
conditions. Our estimates are guided by observing the following
critical accounting policies.
Revenue recognition
We generate revenue by selling pet medication products primarily
to retail consumers and minimally to wholesale customers. Our
policy is to recognize revenue from product sales upon shipment,
when the rights of ownership and risk of loss have passed to the
consumer. Outbound shipping and handling fees are included in
sales and are billed upon shipment. Shipping and handling
expenses are included in cost of sales.
The majority of our sales are paid by credit cards and we usually
receive the cash settlement in one to three banking days. Credit
card sales minimize our accounts receivable balances relative to
our sales. We maintain an allowance for doubtful accounts for
losses that we estimate will arise from the customers' inability
to make required payments, arising from either credit card charge-
backs or insufficient fund checks. We determine our estimates of
the uncollectibility of accounts receivable by analyzing
historical bad debts and current economic trends. At June 30,
2003 the allowance for doubtful accounts was approximately
$26,000.
Valuation of inventory
Inventories consist of prescription and non-prescription pet
medications that are available for sale and are priced at the
lower of cost or market value using a weighted average cost
method. We write down our inventory for estimated obsolescence.
At June 30, 2003 the inventory reserve was approximately
$141,000.
Property and equipment
Property and equipment are stated at cost and depreciated using
the straight-line method over the estimated useful lives of the
assets. The furniture, fixtures, equipment and computer software
are depreciated over periods ranging from three to ten years.
Leasehold improvements and assets under capital lease agreements
are amortized over the shorter of the underlying lease agreement
or the useful life of the asset.
Long-lived assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may
not be recoverable. Recoverability of assets is measured by
comparison of the carrying amount of the asset to net future cash
flows expected to be generated from the asset.
15
Advertising
Our advertising expense consists primarily of television
advertising, internet marketing, and direct mail advertising.
Television costs are expensed as the advertisements are televised
and direct mail costs are expensed when the related print
materials are produced, distributed or superseded.
Accounting for income taxes
We account for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes, which generally requires recognition
of deferred tax assets and liabilities for the expected future
tax benefits or consequences of events that have been included in
the condensed consolidated financial statements or tax returns.
Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting
carrying values and the tax bases of assets and liabilities, and
are measured by applying enacted tax rates and laws for the
taxable years in which those differences are expected to reverse.
Results of Operations
Three Months Ended June 30, 2003 Compared to Three Months Ended
June 30, 2002
-----------------------------------------------------------------
The following should be read in conjunction with our condensed
consolidated financial statements and the related notes thereto
included elsewhere herein. The following table sets forth, as a
percentage of sales, certain items appearing in our condensed
consolidated statements of income.
Three Months Ended June 30,
2003 2002
----------- -----------
Sales 100.0 % 100.0 %
Cost of sales 61.1 57.8
----------- -----------
Gross profit 38.9 42.2
----------- -----------
Operating expenses:
General and administrative 9.9 14.0
Advertising 21.4 18.9
Depreciation and amortization 0.5 0.6
----------- -----------
Total operating expenses 31.8 33.5
----------- -----------
Income from operations 7.1 8.7
----------- -----------
Provision for income taxes 2.4 2.6
----------- -----------
Net income 4.7 6.1
=========== ===========
16
Sales
-----
Sales increased by approximately $15,557,000, or 104.9%, to
approximately $30,388,000 for the quarter ended June 30, 2003,
from approximately $14,831,000 for the quarter ended June 30,
2002. The increase in sales was primarily attributable to the
positive effects of increased advertising and increased retail
reorders. The increase to sales can also be attributed to the
free shipping promotion, which was initiated in March 2003.
Advertising as a percentage of sales increased to 21.4% for the
first quarter of fiscal 2004 from 18.9% for the first quarter of
fiscal 2003.
We have committed certain amounts specifically designated towards
television and direct mail advertising to stimulate sales, create
brand awareness, and acquire new customers. Retail new order
sales have increased by approximately $8,768,000, or 97.5%, to
approximately $17,765,000 for the quarter ended June 30, 2003,
from approximately $8,997,000 for the quarter ended June 30,
2002. Retail reorder sales have increased by approximately
$6,738,000, or 116.8%, to approximately $12,508,000 for the
quarter ended June 30, 2003, from approximately $5,770,000 for
the quarter ended June 30, 2002. We acquired approximately
234,000 new customers for the quarter ended June 30, 2003,
compared to approximately 121,000 new customers for the same
period prior year.
The majority of our product sales are affected by the seasons,
due to the seasonality of mainly heartworm and flea and tick
medications. Industry seasonality trends, according to Fountain
Agricounsel LLC, Management Consultants to Agribusiness, are
divided into percentage of industry sales by quarter. For the
quarters ended March 31, June 30, September 30, and December 31
industry sales are 19%, 37%, 28%, and 16%, respectively. We
cannot accurately predict future sales; however, based on current
circumstances we do not expect a significant variance compared to
the industry trends in the second quarter of fiscal 2004.
Cost of sales
-------------
Cost of sales increased by approximately $10,015,000, or 116.9%,
to approximately $18,583,000 for the quarter ended June 30, 2003,
from approximately $8,568,000 for the quarter ended June 30,
2002. The increase in cost of sales is directly related to the
increase in retail sales in the first quarter of fiscal 2004 as
compared to 2003. As a percent of sales, the cost of sales was
61.1% for the three months ended June 30, 2003, as compared to
57.8% for the three months ended June 30, 2002. This percentage
increase can be directly attributed to the free shipping
promotion.
Gross profit
------------
Gross profit increased by approximately $5,542,000, or 88.5%, to
approximately $11,805,000 for the quarter ended June 30, 2003,
from approximately $6,263,000 for the quarter ended June 30,
2002. Gross profit as a percentage of sales for first quarter of
fiscal 2004 and 2003 was 38.9% and 42.2%, respectively. This
percentage decrease can be attributed to our free shipping
promotion on all orders exceeding $40.
17
General and administrative expenses
-----------------------------------
General and administrative expense increased by approximately
$938,000, or 45.0%, to approximately $3,021,000 for the quarter
ended June 30, 2003, from approximately $2,083,000 for the
quarter ended June 30, 2002. General and administrative expense
as a percentage of sales was 9.9% and 14.0% for the quarter ended
June 30, 2003 and 2002, respectively. The increase in general
and administrative expense for the quarter June 30, 2003 was
primarily due to the following: a $406,000 increase to payroll
expenses which can be attributed to the addition of new employees
in our customer service and pharmacy departments which enabled us
to sustain our continued growth; a $306,000 increase to bank
service and credit card fees and a $121,000 increase to telephone
expenses which is directly related to the increase in the
quarterly sales; and a $105,000 increase in other expenses which
includes insurance, property, and office expenses.
Advertising expenses
--------------------
Advertising expenses increased by approximately $3,702,000, or
131.9%, to approximately $6,509,000 for the quarter ended June
30, 2003, from approximately $2,807,000 for the quarter ended
June 30, 2002. The significant increase in advertising expense
for the quarter ended June 30, 2003 was due to our plan to commit
certain amounts specifically designated towards television and
direct mail advertising to stimulate sales, create brand
awareness, and acquire new customers. We expect this trend of
increased advertising spending to continue into the second
quarter of fiscal 2004.
Depreciation and amortization expenses
--------------------------------------
Depreciation and amortization increased by approximately $47,000,
or 57.9%, to approximately $127,000 for the quarter ended June
30, 2003, from approximately $80,000 for the quarter ended June
30, 2002. This increase to depreciation and amortization expense
for first quarter of fiscal 2004 can be attributed to increased
property and equipment additions mainly related to the warehouse
expansion, since the first quarter of fiscal 2003.
Interest expense
----------------
Interest expense decreased by approximately $3,000, or 52.0%, to
approximately $3,000 for the quarter ended June 30, 2003, from
approximately $6,000 for the quarter ended June 30, 2002.
Interest expense may increase slightly in future quarters, due to
utilizing our $2,000,000 line of credit to increase inventory
levels.
Provision for income taxes
--------------------------
We have incurred significant net losses since our inception in
1996, through the quarter ended June 30, 2001. These losses have
resulted in net operating loss carryforwards, which have been
used by us to offset our tax liabilities. For the fiscal year
ended March 31, 2002, we recorded a full valuation allowance
against the deferred income tax assets, created by net operating
losses, since future utilization of these assets was subject to
our ability to generate taxable income. For the fiscal year
ended March 31, 2003, we recognized a deferred income tax asset
of approximately $581,000, due to the fact that we had
demonstrated the ability to generate taxable income. There are
no guarantees that we will be able to utilize all future net
operating loss carryforwards unless we generate taxable income.
For the quarters ended June 30, 2003 and 2002, we recorded an
income tax provision for approximately $715,000 and $390,000,
respectively; to provide for taxable income as the utilization of
net operating loss carryforwards are limited.
18
Fiscal Year 2003 Compared to Fiscal Year 2002
---------------------------------------------
The following table sets forth, as a percentage of sales, certain
items appearing in our statements of income.
Fiscal Year
---------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
Net sales 100.0 % 100.0 %
Cost of sales 57.3 59.0
-------------- --------------
Gross profit 42.7 41.0
-------------- --------------
Operating expenses:
General and administrative 14.5 19.0
Advertising 21.2 17.9
Severance charges - 0.6
Depreciation and amortization 0.7 1.2
-------------- --------------
Total operating expenses 36.4 38.7
-------------- --------------
Income from operations 6.3 2.3
-------------- --------------
Other income (expense):
Adjustment of estimate for
legal settlement - 1.1
Gain (loss) on disposal of
property and equipment 0.1 (1.0)
Interest expense (0.1) (0.1)
Interest income - 0.1
Other, net - 0.2
-------------- --------------
Total other income (expense): - 0.3
-------------- --------------
Income before provision for
income taxes 6.3 2.6
Provision for income taxes 0.4 -
-------------- --------------
Net income 5.9 2.6
============== ==============
19
Sales
-----
Sales increased by approximately $22,949,000, or 71.7%, to
approximately $54,975,000 for the fiscal year ended March 31,
2003, from approximately $32,026,000 for the fiscal year ended
March 31, 2002. The increase in sales was primarily attributable
to the positive effects of increased advertising and increased
retail reorders, partially offset by a decrease in wholesale
sales. Advertising as a percentage of sales increased to 21.2%
in fiscal 2003 from 17.9% in fiscal 2002. We have committed
certain amounts specifically designated towards television
advertising to stimulate sales, create brand awareness, and
acquire new customers. Retail new order sales have increased by
approximately $10,143,000, or 54.0%, to approximately $28,915,000
for the fiscal year ended March 31, 2003, from approximately
$18,772,000 for the fiscal year ended March 31, 2002. Retail
reorder sales have increased by approximately $15,575,000, or
151.9%, to approximately $25,827,000 for the fiscal year ended
March 31, 2003, from approximately $10,252,000 for the fiscal
year ended March 31, 2002. Wholesale sales have decreased by
approximately $2,769,000, or 92.3%, to approximately $233,000 for
the fiscal year ended March 31, 2003, from approximately
$3,002,000 for the fiscal year ended March 31, 2002. We have
discontinued our wholesale operations to concentrate on retail
sales.
The majority of our product sales are affected by the seasons,
due to the seasonality of mainly heartworm and flea and tick
medications. Industry seasonality trends, according to Fountain
Agricounsel LLC, Management Consultants to Agribusiness, are
divided into percentage of industry sales by quarter. For the
quarters ended March 31, June 30, September 30, and December 31
industry sales are 19%, 37%, 28%, and 16%, respectively. We
cannot accurately predict future sales, however, based on current
circumstances we do not expect a significant variance compared to
the industry trends in the first quarter of fiscal 2004.
Cost of sales
-------------
Cost of sales increased by approximately $12,623,000, or 66.8%,
to approximately $31,518,000 for the fiscal year ended March 31,
2003, from approximately $18,895,000 for the fiscal year ended
March 31, 2002. The increase in cost of sales is directly related
to the increase in retail sales in fiscal 2003 as compared to
2002. However, as a percent of sales, the cost of sales was 57.3%
in fiscal 2003, as compared to 59.0% in fiscal 2002. This
percentage reduction can be attributed to our continued efforts
to purchase medications in larger quantities, by bulk, to take
advantage of any and all purchasing discounts available.
Gross profit
------------
Gross profit increased by approximately $10,326,000, or 78.6%, to
approximately $23,457,000 for the fiscal year ended March 31,
2003 from approximately $13,131,000 for the fiscal year ended
March 31, 2002. Gross profit as a percentage of sales for fiscal
2003 and 2002 was 42.7% and 41.0%, respectively, reflecting the
positive impact of purchasing medications in larger quantities,
receiving purchasing discounts. In February 2003, we initiated a
free shipping program on all orders exceeding $40.
20
General and administrative expenses
-----------------------------------
General and administrative expense increased by approximately
$1,862,000, or 30.6%, to approximately $7,957,000 for the fiscal
year ended March 31, 2003 from approximately $6,095,000 for the
fiscal year ended March 31, 2002. General and administrative
expense as a percentage of sales was 14.5% and 19.0% for the
fiscal years ended March 31, 2003 and 2002, respectively. The
increase in general and administrative expense for the year ended
March 31, 2003 is primarily due to the following: a $1,428,000
increase to payroll expenses which can be attributed to the
addition of new employees in the customer service and pharmacy
departments, which enabled PetMed to sustain its continued
growth, a $493,000 increase to bank service and credit card fees
which is directly related to the increase in fiscal 2003 sales, a
$250,000 increase in property and insurance expenses, which
includes utilities and rental expenses, which can be attributed
to leasing additional space to support our expansion in fiscal
2003, offset with a $285,000 decrease to professional fees, and a
$24,000 decrease to various other expenses.
Advertising expenses
--------------------
Advertising expenses increased by approximately $5,933,000, or
approximately 103.8%, to approximately $11,650,000 for the fiscal
year ended March 31, 2003 from approximately $5,717,000 for the
fiscal year ended March 31, 2002. The significant increase in
advertising expense for the fiscal year ended March 31, 2003 was
due to our plan to commit certain amounts specifically designated
towards television advertising to stimulate sales, create brand
awareness, and acquire new customers. We expect this trend in
advertising to continue into the first and second quarters of
2004.
Severance charges
-----------------
Severance charges for the fiscal year ended March 31, 2002 of
$195,000 relate to severance due to two of our former executive
officers, the CFO and COO. No comparable charges were made in
fiscal 2003.
Depreciation and amortization
-----------------------------
Depreciation and amortization decreased by approximately $9,000,
or 2.4%, to approximately $368,000 for the fiscal year ended
March 31, 2003 from approximately $377,000 for the fiscal year
ended March 31, 2002. The slight decrease to depreciation and
amortization expense for fiscal 2003 can be attributed to a
depreciation expense reduction related to the sale of our
facilities in fiscal 2002, offset by an increase to property
additions in fiscal 2003.
Adjustment of estimate for legal settlement
-------------------------------------------
In fiscal 2002, we recognized income of $345,000 on a reversal of
a legal assessment estimate, which was originally booked in the
fiscal year ended March 31, 2001. On September 28, 2001, PetMed
and the EPA entered into a Consent Agreement and Final Order.
The settlement agreement required us to pay a civil penalty of
$100,000 plus interest, a reduction from the original $445,000
fine.
21
Gain or loss on disposal of property and equipment
--------------------------------------------------
In fiscal 2003, we recorded a gain on disposal of computer
equipment of $15,000. The fully depreciated computer equipment
was sold to an unrelated third party and we received gross
proceeds of $15,000. During fiscal 2002, we recorded a loss on
disposal of land and building of $314,000. A $185,000 loss was
the result of the sale of the corporate office building, which
includes the principal executive offices and warehouse, to an
unrelated third party. We received gross proceeds of $2,150,000,
of which approximately $1,561,000 was used to pay off the
mortgage. The remaining $129,000 loss relates to the impairment
of outdated computer equipment, which we no longer utilized.
Interest expense
----------------
Interest expense decreased by approximately $18,000, or 37.2%, to
approximately $31,000 for the fiscal year ended March 31, 2003
from approximately $49,000 for the fiscal year ended March 31,
2002. The $18,000 decrease can be attributed to a reduction in
interest expense relating to the mortgage payoff of our principal
executive offices in the first quarter of fiscal 2002. Interest
expense may increase further in future quarters, due to our plan
to utilize $2,000,000 of our line of credit to increase inventory
levels during promotion periods.
Provision for income taxes
--------------------------
We incurred significant net losses since our inception in 1996,
through the quarter ended June 30, 2001. These losses have
resulted in net operating loss carryforwards, which we have used
to offset our tax liabilities. For the fiscal year ended March
31, 2002, we recorded a full valuation allowance against the
deferred income tax assets, created by net operating losses,
since future utilization of these assets was subject to our
ability to generate taxable income. For the fiscal year ended
March 31, 2003, we recognized a deferred income tax asset of
approximately $581,000, due to the fact that we had demonstrated
the ability to generate taxable income. There are no guarantees
that we will be able to utilize all future net operating loss
carryforwards, unless we generate taxable income. For the fiscal
years ended March 31, 2003 and 2002, we recorded an income tax
provision for approximately $223,000 and $0, respectively. There
was no income tax provision for fiscal 2002, due to the
utilization of prior net operating losses which offset taxable
income for the period. The effective tax rate for fiscal 2003 of
6.4% is lower than the federal tax rate of 34%; this is primarily
due to the recognition of the deferred tax asset. Upon
recognition of the $581,000 deferred income tax asset, we reduced
our income tax provision by the same amount. This income tax
provision reduction was a tax benefit, which increased net
income.
Net income
----------
Net income increased by approximately $2,433,000, or 294.7%, to
$3,258,000 net income for the fiscal year ended March 31, 2003
from $825,000 net income for the fiscal year ended March 31,
2002. The significant increase was mainly attributable to our
profitable operations and the recognition of a deferred tax asset
of $581,000.
22
Fiscal Year 2002 Compared to Fiscal Year 2001
---------------------------------------------
The following table sets forth, as a percentage of sales, certain
items appearing in our statements of operations.
Fiscal Year
--------------------------------
March 31, 2002 March 31, 2001
-------------- --------------
Net sales 100.0 % 100.0 %
Cost of sales 59.0 63.6
-------------- --------------
Gross profit 41.0 36.4
-------------- --------------
Operating expenses:
General and administrative 19.0 45.0
Advertising 17.9 14.0
Severence charges 0.6 -
Depreciation and amortization 1.2 3.7
-------------- --------------
Total operating expenses 38.7 62.7
-------------- --------------
Income (loss) from operations 2.3 (26.3)
-------------- --------------
Other income (expense):
Adjustment of estimate for
legal settlement 1.1 -
Loss on disposal of property
and equipment (1.0) -
Interest expense (0.1) (2.3)
Interest income 0.1 0.5
Other, net 0.2 (0.1)
-------------- --------------
Total other income (expense): 0.3 (1.9)
-------------- --------------
Income (loss) before provision
for income taxes 2.6 (28.2)
Provision for income taxes - -
-------------- --------------
Net income (loss) 2.6 (28.2)
============== ==============
23
Sales
-----
Sales increased by approximately $22,020,000, or 220.1%, to
approximately $32,026,000 for the fiscal year ended March 31,
2002, from approximately $10,006,000 for the fiscal year ended
March 31, 2001. The increase in sales was primarily attributable
to the positive effects of increased advertising. Advertising as
a percentage of sales increased to 17.9% in fiscal 2002 from
14.0% in fiscal 2001. We have committed certain amounts
specifically designated towards television advertising to
stimulate sales and create brand awareness. Historically, sales
have a tendency to increase in the first and second fiscal
quarters due to the seasonality of certain pet medications.
Cost of sales
-------------
Cost of sales increased by approximately $12,527,000, or 196.7%,
to approximately $18,895,000 for the fiscal year ended March 31,
2002, from approximately $6,368,000 for the fiscal year ended
March 31, 2001. The increase in cost of sales is directly related
to the increase in retail sales in fiscal 2002 as compared to
2001. However, as a percent of sales, the cost of sales was
59.0% in fiscal 2002, as compared to 63.6% in 2001. This
percentage reduction can be attributed to our continued efforts
to purchase medications in larger quantities, by bulk, to take
advantage of any and all purchasing discounts and promotions
available.
Gross profit
------------
Gross profit increased by approximately $9,493,000, or 260.9%, to
approximately $13,132,000 for the fiscal year ended March 31,
2002 from approximately $3,639,000 for the fiscal year ended
March 31, 2001. Gross profit as a percentage of sales for fiscal
2002 and 2001 was 41.0% and 36.4%, respectively, reflecting the
positive impact of purchasing medications in larger quantities.
General and administrative expenses
-----------------------------------
General and administrative expense increased by approximately
$1,588,000, or 35.2%, to approximately $6,095,000 for the fiscal
year ended March 31, 2002 from approximately $4,507,000 for the
fiscal year ended March 31, 2001. General and administrative
expense as a percentage of sales was 19.0% and 45.0% for the
fiscal years ended March 31, 2002 and 2001, respectively. The
increase in general and administrative expense for the year ended
March 31, 2002 is primarily due to the following: a $1,159,000
increase to payroll expenses can be attributed to the addition of
new employees in the customer service and pharmacy departments,
which enabled us to sustain continued growth, a $599,000 increase
to bank service and credit card fees is directly related to the
increase in fiscal 2002 sales, a $268,000 increase in property
and office expenses, which includes utilities and rental
expenses, which can be attributed to leasing our facilities for
the majority of fiscal 2002, while owning the same facility in
fiscal 2001, a $37,000 increase in telephone and other expenses,
offset with a $424,000 decrease to professional fees, and a
$51,000 reduction in travel and entertainment expenses.
Advertising expenses
--------------------
Advertising expenses increased by approximately $4,320,000, or
approximately 309.1%, to approximately $5,717,000 for the fiscal
year ended March 31, 2002 from approximately $1,397,000 for the
fiscal year ended March 31, 2001. The significant increase in
advertising expense for the fiscal year ended March 31, 2002 was
due to our plan to commit certain amounts specifically designated
towards television advertising to stimulate sales and create
brand awareness.
Severance charges
-----------------
Severance charges for the fiscal year ended March 31, 2002 of
$195,000 relate to severance due to two of our former executive
officers, the CFO and COO. No comparable charges were made in
fiscal 2001.
24
Depreciation and amortization expenses
--------------------------------------
Depreciation and amortization expenses increased by approximately
$3,000, or .8%, to approximately $377,000 for the fiscal year
ended March 31, 2002 from approximately $374,000 for the fiscal
year ended March 31, 2001. The slight increase to depreciation
and amortization expense for fiscal 2002 can be attributed to a
significant increase in property additions, offset with the
depreciation expense reduction related to the sale of our
facilities in fiscal 2002.
Adjustment of estimate for legal settlement
-------------------------------------------
In fiscal 2002, we recognized income of $345,000 on a reversal of
a legal assessment estimate, which was originally booked in
fiscal year ended March 31, 2001. On September 28, 2001, PetMed
and the EPA entered into a Consent Agreement and Final Order
("CAFO"). The settlement agreement requires us to pay a civil
penalty of $100,000 plus interest, a reduction from the original
$445,000 fine. For the purpose of this CAFO, we admitted to the
jurisdictional allegations set forth, and neither admitted nor
denied the alleged violations.
Loss on disposal of property and equipment
------------------------------------------
During fiscal 2002, we recorded a loss on disposal of land and
building of $314,000. A $185,000 loss was the result of the
sale of the corporate office building, which includes the
principal executive offices and warehouse, to an unrelated third
party. We received gross proceeds of $2,150,000, of which
approximately $1,561,000 was used to pay off the mortgage. The
remaining $129,000 loss relates to the impairment of outdated
computer equipment, which we no longer utilized.
Other income and expenses
-------------------------
Other income and expenses decreased by approximately $234,000, or
124.5%, to approximately $47,000 of other income for the fiscal
year ended March 31, 2002 from approximately $188,000 of other
expense for the fiscal year ended March 31, 2001. The $234,000
decrease can be attributed to a reduction in interest expense
relating to the mortgage payoff of our principal executive
offices.
Provision for income taxes
--------------------------
We incurred significant net losses since our inception in 1996.
These losses have resulted in net operating loss carryforwards
and deferred tax assets, which we have used to offset tax
liabilities, which may have been incurred in prior periods. We
recorded a valuation allowance against the deferred income tax
assets, since future utilization of these assets is subject to
our ability to generate taxable income. There was no income tax
accrual for the fiscal years ended March 31, 2002 and 2001 due to
the utilization of prior net operating losses to offset taxable
income for the period.
Net income (loss)
-----------------
Net income (loss) increased by approximately $3,652,000, or
129.2%, to $825,000 net income for the fiscal year ended March
31, 2002 from $2,827,000 net loss for the fiscal year ended March
31, 2001. The increase was attributable to the aforementioned.
25
Liquidity and Capital Resources
-------------------------------
Our working capital at March 31, 2003 was $3,018,000, as compared
to the $691,000 at March 31, 2002, an increase of approximately
$2,327,000. The increase in working capital was primarily
attributable to our profitable operations which resulted in net
cash provided by operating activities of $970,000 and $476,000
for the years ended March 31, 2003 and 2002, respectively. Net
cash used in investing activities was $1,095,000 for the year
ended March 31, 2003 as compared to net cash provided by
investing activities of $1,461,000 for the year ended March 31,
2002, primarily as a result of increased property and intangible
asset additions in fiscal 2003, compared to the proceeds received
from the sale of the corporate office building and land in fiscal
2002. Net cash provided by financing activities increased to
$371,000 for the year ended March 31, 2003, as compared to net
cash used in financing activities of $1,609,000 for the year
ended March 31, 2002. This increase relates directly to proceeds
received upon the exercise of stock options and warrants offset
by repayment of the line of credit in fiscal 2003, as compared to
the satisfaction of the mortgage in fiscal 2002.
Since our inception, we have primarily funded our growth through
the private placement of securities. In April 1998, we raised an
additional $888,000 of net proceeds from the private placement of
250,000 shares of Convertible Preferred Stock. In February 1999,
we raised approximately $819,000 of net proceeds from the sale of
330,333 shares of common stock. In November 2000 we raised
$2,000,000 from the private placement of 10,000,000 shares of
equity securities.
On May 31, 2001, we sold our 50,000 square foot office building,
which houses our principal executive offices and warehouse, to an
unrelated third party. We received gross proceeds of $2,150,000,
of which approximately $1,561,000 was used to pay off the
mortgage, and we recognized a loss on the sale of approximately
$185,000. We then entered into a five-year term lease agreement
for 20,000 of the 50,000 square foot Pompano Beach office
building. On February 22, 2002, we entered into a lease addendum
which added approximately 12,000 square feet, effective June 1,
2002, to accommodate our warehouse expansion. On July 25, 2003
we signed an amendment to our current lease agreement to obtain
an additional 8,000 square feet, with an option to add another
3,600 square feet, to our current 32,000 square foot facility,
which will be available October 1, 2003. This addition to the
warehouse was necessary to increase our capacity to store
additional inventory during our peak season.
We maintain a $2,000,000 line of credit, effective through July
22, 2004. The interest rate is at the published thirty day
London Interbank Offered Rates ("LIBOR") plus 2.65% (3.75% at
June 30, 2003), and contains various financial and operating
covenants. At June 30, 2003, there was no outstanding balance
under the line of credit agreement.
As of June 30, 2003 we had no outstanding lease commitments. Our
sources of working capital include the line of credit, cash from
operations, and the exercise of stock options and warrants. For
the remainder of fiscal 2004, we have approximately $440,000
planned for capital expenditure commitments to further our
growth to add backup computer equipment to sustain business
during an outage. These capital expenditures will be funded
through cash from operations.
On March 12, 2002, we entered into a $205,000, three year term
loan agreement with a bank, with interest accruing at the lending
institution's base rate plus 1% (5.25% at May 31, 2003). The
loan proceeds were used to purchase a $250,000 computer server.
The aggregate loan maturities are $68,000 per year for three
years. The line of credit and the term loan are secured by
substantially all of our assets.
26
For the year ended March 31, 2001, we had incurred significant
operating losses and cash flow deficiencies. However, for the
year ended March 31, 2003 and 2002 we have had net income of
$3,258,000 and $825,000, and have sustained profitability for
seven consecutive quarters. We may seek to raise additional
capital through the sale of equity securities. No assurances can
be given that we will be successful in obtaining additional
capital, or that such capital will be available in terms
acceptable to us. At this time, we have no commitments or plans
to obtain additional capital. Further, there can be no
assurances that even if such additional capital is obtained that
we will sustain profitability or positive cash flow.
Recent Accounting Pronouncements
--------------------------------
We do not believe that any recently issued, but not yet
effective, accounting standards, if currently adopted, will have
a material effect on our consolidated financial position, results
of operations or cash flows.
Quarterly Results of Operations
-------------------------------
The following table presents selected consolidated financial
information for each of the eight fiscal quarters through March
31, 2003 and the first fiscal quarter for the fiscal year ending
March 31, 2004. The information has been derived from our
unaudited consolidated financial statements which, in our
opinion, reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the quarterly
information.
Quarter Ended: June 30, 2003
------------- -------------
Sales $ 30,387,563
Income from operations $ 2,147,288
Net income $ 1,432,584
Diluted net income per
share $ 0.06
Quarter Ended: June 30, 2002 September 30, 2002 December 31, 2002 March 31, 2003 (a)
------------- ------------- ------------------ ----------------- --------------
Sales $ 14,830,755 $ 14,229,702 $ 11,050,124 $ 14,864,335
Income from operations $ 1,291,235 $ 307,754 $ 693,269 $ 1,190,749
Net income $ 902,329 $ 204,887 $ 434,710 $ 1,715,639
Diluted net income per share $ 0.04 $ 0.01 $ 0.02 $ 0.09
Quarter Ended: June 30, 2001 September 30, 2001 December 31, 2001 March 31, 2002
------------- ------------- ------------------ ----------------- --------------
Sales $ 5,363,650 $ 7,762,825 $ 8,248,904 $ 10,650,552
(Loss) income from
operations $ (880,765) $ 56,246 $ 368,433 $ 1,204,026
Net (loss) income $ (1,090,684) $ 393,378 $ 353,348 $ 1,169,371
Diluted net (loss) income
per share $ (0.07) $ 0.02 $ 0.02 $ 0.07
Quarter Ended: June 30, 2000 September 30, 2000 December 31, 2000 March 31, 2001
------------- ------------- ------------------ ----------------- --------------
Sales $ 2,636,715 $ 2,667,336 $ 1,795,439 $ 2,906,795
Loss from operations $ (960,837) $ (248,212) $ (326,564) $ (1,103,485)
Net loss $ (1,037,944) $ (298,602) $ (364,202) $ (1,125,959)
Diluted net loss per share $ (0.16) $ (0.05) $ (0.03) $ (0.04)
(a) We recorded a deferred tax asset of approximately $581,000,
during the quarter ended March 31, 2003, resulting in an
increase of diluted net income of $.03 per share.
27
Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Market risk generally represents the risk that losses may occur
in the value of financial instruments as a result of movements in
interest rates, foreign currency exchange rates and commodity
prices. Our financial instruments include cash and cash
equivalents, accounts receivable, accounts payable, line of
credit, and debt obligations. The book value of cash
equivalents, accounts receivable, and accounts payable are
considered to be representative of fair value because of the
short maturity of these instruments. We estimate that the fair
value of all of our debt obligations approximate $120,000 as of
June 30, 2003.
We do not utilize financial instruments for trading purposes and
we do not hold any derivative financial instruments that could
expose us to significant market risk. Our exposure to market
risk for changes in interest rates relates primarily to our
obligations under our line of credit. As of August 12, 2003,
there was no outstanding balance under the line of credit
agreement. A ten percent increase in short-term interest rates
on the variable rate debts outstanding as of August 12, 2003
would not have a material impact on our quarterly interest
expense, assuming the amount of debt outstanding remains
constant.
The above sensitivity analysis for interest rate risk excludes
accounts receivable, accounts payable and accrued liabilities
because of the short-term maturity of such instruments. The
analysis does not consider the effect this movement may have on
other variables including changes in revenue volumes that could
be indirectly attributed to changes in interest rates. The
actions that management would take in response to such a change
are also not considered. If it were possible to quantify this
impact, the results could well be different than the sensitivity
effects shown above.
BUSINESS
General
-------
PetMed Express, Inc. and subsidiaries, d/b/a 1-800-PetMeds, is a
leading nationwide pet pharmacy. We market prescription and non-
prescription pet medications along with health and nutritional
supplements for dogs and cats direct to the consumer. We offer
consumers an attractive alternative for obtaining pet medications
in terms of convenience, price, and speed of delivery.
We market our products through national television, on-line and
direct mail advertising campaigns, which aim to increase the
recognition of the "1-800-PetMeds" brand name, increase traffic
on our web site at www.1800PetMeds.com, acquire new customers,
and maximize repeat purchases. We are a Florida corporation
organized in January 1996.
Our Products
------------
We offer a broad selection of products for dogs and cats. These
products include a majority of the well-known brands of
medication, such as Frontline[R], Advantage[R], Heartgard[R],
Sentinel[R], Interceptor[R], Program[R], Revolution[R], and
Rimadyl[R]. Generally, our prices are discounted up to 25%, from
the prices for medications charged by veterinarians.
We regularly select new products or the latest generation of
existing products to become part of our product selection. In
addition, we also refine our current products to respond to
changing consumer-purchasing habits. Our web site is designed to
give us the flexibility to change featured products or
promotions. Our product line provides customers with a wide
variety of selections across the most popular health categories
for dogs and cats. Our current products include:
28
Prescription Medications: Heartworm medications, antibiotics,
anti-inflammatory medications and medications for chronic
diseases, such as arthritis and thyroid conditions, as well as
several generic substitutes;
Non-Prescription Medications: A majority of the well-known flea
and tick control products; and health and nutritional
supplements.
Sales
-----
The following table provides a breakdown of the percentage of our
total sales, by each category during the indicated periods:
Fiscal Year Ended
March 31, 2003 March 31, 2002
-------------- --------------
Prescription medications 29% 34%
Non-prescription medications 64% 58%
Shipping and handling charges
and other 7% 8%
-------------- --------------
Total 100% 100%
============== ==============
During March 2001, we discontinued the sales of all accessories.
Additionally, we discontinued the PetMed Express, Inc. membership
plan. It was determined by management to concentrate sales
efforts on the prescription and non-prescription pet medications
and the health and nutritional pet supplements.
We offer our products through three main sales channels,
including the PetMed Express catalog and postcards, customer
service representatives and the Internet, through our web site at
www.1800PetMeds.com. We have designed both our catalog and web
site to provide a convenient, cost-effective and informative
shopping experience that encourages consumers to purchase
products important for a pet's health and quality of life. We
believe that these multiple channels allow us to increase the
visibility of our brand name and provide customers with increased
shopping flexibility and service.
The PetMed Express Catalog
The PetMed Express catalog is a full-color catalog that features
approximately 300 products. The catalog is produced by a
combination of in-house writers, production artists and
independent contractors. We mail catalogs and postcards in
response to requests generated from our advertising and direct
mail campaigns.
Contact Center
We currently employ 100 customer service representatives in our
contact center. Our customer service representatives receive and
process inbound customer calls, facilitate our outbound campaigns
around maximizing customers' reorders on a consistent basis,
facilitate our live web chat and process customer e-mails. Our
telephone system is equipped with certain features including pop-
up screens and call blending capabilities that give us the
ability to efficiently utilize our customer service
representatives' time, providing quality customer service and
support. Our customer service representatives receive a base
salary and are rewarded with commissions for achieving targeted
sales.
29
Our Web Site
We seek to combine our product selection and pet health
information with the shopping ease of the Internet to deliver a
convenient and personalized shopping experience. We believe that
our web site offers health and nutritional product selections for
dogs and cats, supported by relevant editorial and easily
obtainable or retrievable resource information. From our home
page, customers can search our web site for products and access
resources on a variety of information on cats and dogs.
Customers can shop at our web site by category, product line or
individual product. We attracted approximately 3.8 million
visitors to our website over the past 12 months (June 2002 to May
2003), of which 12% of those visitors resulted in a sale, and our
website generated 44% of our total sales for the same time
period.
Our Customers
-------------
As of May 31, 2003, approximately 830,000 customers have
purchased from us within the last eighteen months. During fiscal
2003, we attracted approximately 414,000 new customers. Our
customers are located throughout the United States, with the
largest concentration of customers residing in California,
Florida, Texas, New York, Georgia, Virginia and New Jersey. The
average retail purchase was approximately $71.
While our primary focus has been on retail customers, we have
also sold various non-prescription medications wholesale to a
variety of businesses, including pet stores, groomers and
traditional brick and mortar stores in the United States. For
the fiscal year ended March 31, 2003, the majority of our sales
were made to retail customers with less than 1% of our sales made
to wholesale customers. Our focus remains on the retail
customers, and we anticipate that the percentage of our total
sales attributable to wholesale sales will continue to decrease
in the future.
Marketing
---------
The goal of our marketing strategy is to build brand recognition,
increase customer traffic, add new customers, build strong
customer loyalty, maximize reorders and develop incremental
revenue opportunities. We have an integrated marketing campaign
that includes television advertising, direct mailing and e-
mailing and online marketing.
Television Advertising
Our television advertising is designed to build brand equity,
create awareness, and generate initial purchases of products via
phone, mail, fax and the Internet. We have used 30 second and 15
second television commercials to attract new customer orders,
with this tagline "your pet's same exact medications delivered to
your home, saving you time and money". Our television
commercials typically focus on our ability to rapidly deliver to
customers the same medications offered by veterinarians, but at
reduced prices. We generally purchase advertising on national
cable channels to target our key demographic groups. We believe
that television advertising is particularly effective and
instrumental in building brand awareness.
Direct Mailing and E-mailing
We use direct mailing and e-mailing, for our customers with e-
mail accounts, to advertise our products to selected groups of
customers. We utilize potential customers from the responses to
our television advertising and our customer database to encourage
and remind our customers to reorder.
30
Online Marketing
We supplement our traditional advertising with online advertising
and marketing efforts. We are members of the LinkShare Network,
which is an affiliate program with merchant clients and affiliate
web sites. This network is designed to develop and build a long-
term, branded affiliate program in order to increase online sales
and establish an Internet presence. The LinkShare Network
enables us to establish link arrangements with other web sites,
as well as portals and search engines. We also make our brand
available to internet consumers by publishing targeted keywords
and achieving prominent placement on the top search engines and
search engine networks, including Google, Microsoft Network,
Yahoo, and Overture.
Operations
----------
Purchasing
We purchase our products from a variety of sources, including
certain manufacturers, domestic distributors, and wholesalers.
We have multiple suppliers for each of our products. We source
prescription and non-prescription medications from a variety of
national distributors in order to obtain the lowest cost. We
purchase the majority of our health and nutritional supplements
directly from manufacturers. Having strong relationships with
product manufacturers will ensure the availability of adequate
volume of products ordered by our customers, and enable us to
provide more and better product information. Historically,
substantially all the major manufacturers of prescription and
non-prescription medications have declined to sell these products
to direct marketing companies, including us. Sales of
prescription and non-prescription medication products accounted
for 93% and 92% of our total sales for the fiscal years ended
March 31, 2003 and 2002, respectively. As part of our growth
strategy, we will seek to develop direct relationships with
leading pharmaceutical manufacturers of t he more popular
prescription and non-prescription medications.
Order Processing
We provide our customers with toll-free telephone access to our
customer service representatives. Our call center generally
operates from 8:00 AM to 11:00 PM Monday through Thursday, 8:00
AM to 9:00 PM on Friday, 9:00 AM to 6:00 PM on Saturday, and
10:00 AM to 5:00 PM on Sunday, Eastern Standard Time. The
process of customers purchasing products through us consists of
a few simple steps. A customer first places a call to our toll
free phone number or visits our web site. The following
information is needed to process prescription orders: general
pet information, prescription, and the veterinarian's name and
phone number. This information is entered into our computer
system. Then our pharmacists and pharmacy technicians verify
all prescriptions. The order process system checks for
prescription verification for medication orders and a valid
payment method for all orders. An invoice is generated and
printed in our fulfillment center, where items are picked for
shipping. The customer's order is then selected from our
inventory and shipped via priority mail or United Parcel Service.
Our customers enjoy the convenience of rapid home delivery, with
approximately 69% of all orders shipped within 24 hours via
priority mail or United Parcel Service. Our web site allows
customers to easily browse and purchase substantially all of our
products and services on line. Our site is designed to be fast,
secure and easy to use with order and shipping confirmations,
with on-line order tracking capabilities.
31
Warehousing and Shipping
We inventory our products and fill all customer orders from our
32,000 square foot facility in Pompano Beach, Florida. We have
an in-house fulfillment and distribution operation, which is used
to manage the entire supply chain, beginning with the placement
of the order, continuing through order processing, and then
fulfillment and shipment of the product to the customer. We
offer a variety of shipping options, including next day delivery.
We ship to anywhere in the United States served by the United
Parcel Service or the United States Postal Service. Priority
orders are expedited in our fulfillment process. Our goal is to
ship the products the same day that the order is received. For
prescription medications, our goal is to ship the product
immediately after the prescription has been authorized.
Customer Service and Support
We believe that a high level of customer service and support is
critical in retaining and expanding our customer base. Customer
service representatives participate in ongoing training programs
under the supervision of our training manager. These training
sessions include a variety of topics such as product knowledge,
computer usage, customer service tips and the relationship
between veterinarians and us. Our customer service
representatives process customer calls, and respond to customers
via e-mails and live web chat. If our customer service
representatives are unable to respond to a customer's inquiry at
the time of the call, we strive to provide an answer within 24
hours. We believe our customer service representatives are a
valuable source of feedback regarding customer satisfaction. For
the last twelve months ended June 30, 2003, customer returns and
credits averaged approximately 1.5% of total sales.
Technology
----------
We utilize the latest integrated technologies in call center, e-
commerce, order entry, and inventory control/fulfillment
operations. The systems are custom configured by us to optimize
our computer telephone integration and mail order processing.
The system is designed to maintain a large database of
specialized information and process a large volume of orders
efficiently and effectively. Our systems provide our agents with
real time product availability information and updated customer
information to enhance our customer service. We also have an
integrated direct connection for processing credit cards to
ensure that a valid credit card number and authorization have
been received at the same time our agents are on the phone with
the customers. Our information systems provide our agents with
records of all prior contact with a customer, including the
customer's address, phone number, e-mail address, fax number,
prescription information, order history, payment history and
notes.
Competition
-----------
The pet medications and health and nutritional supplements market
is competitive and highly fragmented. Our competitors can be
divided into several groups including: veterinarians, other mail-
order suppliers of pet medications and health and nutritional
supplements, and web or online stores that specialize in pet
medications and health and nutritional supplements. We believe
that the following are principal competitive factors in our
market:
* Product selection and availability, including the
availability of prescription and non-prescription
medications;
* Brand recognition;
* Reliability and speed of delivery;
* Personalized service and convenience;
* Price; and
* Quality of web site content.
32
We compete with veterinarians in the sale of prescription and
non-prescription pet medications and health and nutritional
supplements. Many pet owners may prefer the convenience of
purchasing the pet medications or health and nutritional
supplements at the time of the veterinarian visit, or may be
hesitant to offend their veterinarian, by not purchasing these
products from the veterinarian. In order to effectively compete
with veterinarians, we must continue to educate pet owners about
the service, convenience and savings offered by us.
We also compete with brick and mortar and online retailers of
non-prescription medications and health and nutritional
supplements. Many of these competitors have longer operating
histories, larger customer or user bases, a more established
online presence, greater brand recognition and significantly
greater financial, marketing and other resources than we do.
Many of these current and potential competitors can devote
substantially more resources to web site and systems development
than we can.
The pet medication market size is estimated to be approximately
$3 billion, with veterinarians having the majority of the market
share. The cat and dog population is approximately 141 million,
with approximately 62% of all households owning a pet.
We believe that the following are the main competitive strengths
which differentiate 1-800-PetMeds from the competition:
* Experienced management team;
* Consumer benefit structure of savings and convenience;
* Licensed pharmacy to conduct business in 49 states;
* Operating / technology infrastructure in place;
* Multiple sources of supply for pet medications; and
* Quality customer service support.
Intellectual Property
---------------------
We conduct our business under the trade name "1-800-PetMeds". We
believe this name, which is also our toll-free phone number, has
added significant value and is an important factor in the
marketing of our products. We have also obtained the right to
the Internet addresses www.1800PetMeds.com, www.1888PetMeds.com,
www.petmedexpress.com, along with www.petmeds.com. As with
phone numbers, we do not have and cannot acquire any property
rights in an Internet address. We do not expect to lose the
ability to use the Internet addresses; however, there can be no
assurance in this regard and the loss of these addresses may have
a material adverse effect on our financial position and results
of operations. We hold the trade name "Petmed Express[R]" and
"1-888-Petmeds[R]", which are our registered trademarks.
33
Government Regulation
---------------------
Dispensing prescription medicines is governed at the state level
by the board of pharmacy, or similar regulatory agencies, of each
state where prescription medications are dispensed. We are
subject to regulation by the State of Florida and, in particular,
are licensed by the Florida Board of Pharmacy. Our license is
valid until February 28, 2004. We are also licensed and/or
regulated by 48 other state pharmacy boards and other regulatory
authorities including, but not necessarily limited to, the Food
and Drug Administration ("FDA") and the United States
Environmental Protection Agency ("EPA"). As a licensed pharmacy
in the State of Florida, we are subject to the Florida Pharmacy
Act and regulations promulgated hereunder. To the extent that we
are unable to maintain our license with the Florida Board of
Pharmacy as a community pharmacy, or if we do not maintain the
licenses granted by other state boards, or if we become subject
to actions by the FDA, or other enforcement regulators, our
distribution of prescription medications to pet owners could
cease, which could have a material adverse effect on our
operations. See Legal Proceedings.
Employees
---------
We currently have 164 full time employees, including: 100 in
marketing and customer service; 16 in fulfillment and purchasing;
37 in our pharmacy; 2 in information technologies; 5 in
administrative positions; and 4 in management. None of our
employees are represented by a labor union, nor governed by any
collective bargaining agreements. We consider relations with our
employees as satisfactory.
Properties
----------
Our facilities, including our principal executive offices, are
located at 1441 SW 29th Avenue, Pompano Beach, FL 33069. We
purchased this building, a 50,000 square foot building, in
February 1999, and financed it with a seven year, 7.75% mortgage
with a commercial bank in the original principal amount of
$1,680,000. On May 31, 2001, we sold this building, which houses
our principal executive offices and warehouse, to an unrelated
third party. We received gross proceeds of $2,150,000, of which
approximately $1,561,000 was used to pay off the mortgage, and we
recognized a loss on the sale of approximately $185,000. We then
entered into a five-year term lease agreement for 20,000 of the
50,000 square foot Pompano Beach office building. On February
22, 2002, we entered into a lease addendum which added
approximately 12,000 square feet, effective June 1, 2002, to
accommodate our warehouse expansion. On July 25, 2003 we signed
an amendment to its current lease agreement to obtain an
additional 8,000 square feet, with an option to add another 3,600
square feet, to its current 32,000 square foot facility, which
will be available October 1, 2003. This addition to the
warehouse was necessary to increase our capacity to store
additional inventory during our peak season. The future minimum
annual lease payments as of March 31, 2003, are as follows:
$313,000 for fiscal 2004, $361,000 for fiscal 2005, $376,000 for
fiscal 2006, and $63,000 for fiscal 2007.
We believe our properties are in good condition, well-maintained
and generally suitable and adequate to carry on our business. We
also believe that we maintain sufficient insurance coverage on
all of our real and personal property.
34
Legal Proceedings
-----------------
Various complaints had been filed with the Florida Board of
Pharmacy. These complaints, the majority of which were filed by
veterinarians who are in competition with us for the sale of pet
prescription-required products, alleged violations of the
Pharmacy Practice Act and regulations promulgated there under.
The vast majority of the complaints alleged that we, through our
pharmacists, improperly dispensed prescription-required
veterinary medication based on prescriptions verified through our
discontinued alternate veterinarian program. The alternate
veterinarian program used a veterinarian outside the state of
Florida to verify prescriptions for certain pets outside the
state of Florida. While the program was not used for pets
residing in the state of Florida, the complaints had, for the
most part, been filed with the Florida Board of Pharmacy. Other
complaints alleged the dispensing of medication without a valid
prescription, the sale of non-conforming products and that our
pharmacy was operating at the same location as another pharmacy,
with which it had a contractual relationship. We contested all
allegations and continued discussions in an attempt to reach a
resolution of these matters.
In February 2002, we voluntarily ceased the use of the alternate
veterinarian program, and in March 2002 a business decision was
made to enter into a settlement agreement with the Florida Board
of Pharmacy, rather than to proceed with costly and lengthy
litigation. In April 2002, the Florida Board of Pharmacy
approved the settlement agreement. The Florida Board of Pharmacy
did not reach any finding of fact or conclusion of law that we
committed any wrongdoing or violated any rules or laws governing
the practice of pharmacy. According to the settlement agreement,
our pharmacy license was placed on probation for a period of
three years and we, our pharmacists and contracted pharmacy and
pharmacist, paid approximately $120,000 in fines and
investigative costs, in July 2002. We remain licensed with the
State of Florida and continue to operate our principal business
in Florida.
Additional complaints have been filed with other states' Pharmacy
Boards. These complaints, the majority of which were filed by
veterinarians who are in competition with us for the sale of pet
prescription-required products, allege violations of the Pharmacy
Practice Act and regulations promulgated there under. The vast
majority of the complaints allege that we, through our
pharmacists, improperly dispensed prescription-required
veterinary medication based on prescriptions verified through our
alternate veterinarian program. We contested all allegations and
continued discussions in an attempt to reach a resolution of
these matters.
In fiscal 2003, we reached settlement agreements with the
Louisiana, Missouri, New Mexico, and Ohio State Pharmacy Boards.
According to the settlement agreements, we were required to
terminate the alternate veterinarian program in the state and our
permit was placed on probation. As of March 31, 2003, we had
paid all fines in full to cover any or all administrative and
investigative costs associated with these settlements. There can
be no assurances made that other states will not attempt to take
similar actions against us in the future.
In February 2000, the United States Environmental Protection
Agency ("EPA") issued a Stop Sale, Use or Removal Order to us
regarding the alleged distribution or sale of misbranded
Advantage products in violation of the Federal Insecticide,
Fungicide, and Rodenticide Act ("FIFRA"), as amended. The order
provides that we shall not distribute, sell, use or remove the
products listed in the order, which are allegedly misbranded.
The order further provides that we shall not commence any sale or
distribution of those products without the prior written approval
from the EPA. The Stop Sale, Use or Removal Order does not
assert any claim for monetary damages; rather, it is in the
nature of a cease and desist order. We denied any alleged
violations. On February 16, 2000, we submitted a written
response to the order. The EPA assessed a fine in the amount of
$445,000. In fiscal 2001 we accrued $445,000 of legal settlement
expense.
35
In September 2001, we and the EPA entered into a Consent
Agreement and Final Order ("CAFO"). The settlement agreement
required us to pay a civil penalty of $100,000 plus interest,
requiring a payment of $56,000, which was paid in September 2002,
and $53,000 due on September 30, 2003, a reduction from the
previously assessed fine of $445,000. For the purpose of this
CAFO, we admitted to the jurisdictional allegations set forth,
and neither admitted nor denied the alleged violations. On
September 28, 2001, the CAFO was approved and ordered by the
regional judicial officer. Accordingly, a gain of $345,000 was
reflected in the statement of income for the year ended March 31,
2002, to reflect the adjustment to this settlement.
On March 19, 2002, Novartis Animal Health U.S., Inc. ("Novartis")
filed a complaint against us and two other defendants in U.S.
District Court for the Southern District of Florida. Novartis
purports to assert seven claims related to our alleged sale of
pet medications produced for a Novartis Australian sister
company: Count I: Infringement of Registered Trademark Under
Section 32 of the Lanham Act, 15 U.S.C. 1114; Count II:
Infringement of Unregistered Trademarks Under Section 43(a) of
the Lanham Act, 15 U.S.C. 1125(a); Count III: False Advertising
Under Section 43(a) of the Lanham act, 15 U.S.C. 1125(a); Count
IV: Misleading Advertising Under Florida Statutory Law; Count V:
Deceptive and Unfair Trade Practices Under Florida Statutory Law;
Count VI: Injury to Business Reputation Under Florida Statutory
Law; Count VII: Common Law Unfair Competition. Subsequent to the
year ended March 31, 2003, we reached a final settlement
agreement with Novartis. According to the confidential
settlement agreement dated April 7, 2003, we had satisfactorily
resolved the contested issues raised by the complaint and the
confidential settlement terms had no material impact on our
operations and financial results.
We are a defendant in a lawsuit in Texas state district court
seeking injunctive and monetary relief styled Texas State Board
of Pharmacy and State Board of Veterinary Medical Examiners v.
PetMed Express, Inc. Cause No.GN-202514, in the 201st Judicial
District Court, Travis County, Texas. In our initial pleading we
denied the allegations contained therein. We will vigorously
defend, are confident of our compliance with the applicable law,
and finds wrong-on-the-facts the vast majority of the allegations
contained in the Plaintiffs' supporting documentation attached to
the lawsuit. Discovery has recently commenced. At this early
stage of the litigation it is difficult to assess any possible
outcome or estimate any potential loss in the event of an adverse
outcome.
Routine Proceedings
-------------------
We are a party to routine litigation incidental to our business.
Management does not believe that the resolution of any or all of
such routine litigation is likely to have a material adverse
effect on our financial condition or results of operations.
36
MANAGEMENT
Directors and Executive Officers
Set forth below is information regarding the board of directors
and executive officers of the Company:
Name Office Age
--------------------- ----------------------- -----
Marc A. Puleo, M.D. Chairman of the Board
and President 40
Menderes Akdag Chief Executive Officer
and Director 42
Bruce S. Rosenbloom Chief Financial Officer
and Treasurer 34
Robert C. Schweitzer Director 56
Ronald J. Korn Director 63
Gian Fulgoni Director 55
Frank J. Formica Director 59
MARC PULEO, M.D., age 40, has served as Chairman of our Board of
Directors since our inception in January 1996. From January 1996
until March 2000, Dr. Puleo also served as our President, from
January 1996 until March 2001, Dr. Puleo served as our Chief
Executive Officer, from January 1996 until May 2000, and Dr.
Puleo served as our Treasurer from January 1996 to May 2001. Dr.
Puleo has also been the President of South Florida Anesthesia
Professionals, an entity located in Fort Lauderdale, Florida,
since founding that company in January 1996. Dr. Puleo was Vice
President of Dynamic Press, Inc., an offset printing and direct
marketing company, from June 1997 until June 1998. Dr. Puleo, an
anesthesiologist, was employed with Anesthesia Professional
Association, North Ridge Medical Center and North Ridge
Outpatient Surgery Center from December 1994 through December
1995. Dr. Puleo was an anesthesia resident with the University
of Illinois Hospitals and Clinics, the Michael Reese Hospital,
the Westside Veteran's Administration Hospital, the University of
Illinois Eye and Ear Infirmary, the Nathan Cummings Surgicenter,
and the University of Illinois Pain Clinic, all located in the
Chicago, Illinois area, from July 1991 through June 1994.
Dr. Puleo received his medical degree from the University of
Illinois College of Medicine, Chicago, Illinois.
MENDERES AKDAG, age 42, was appointed Chief Executive Officer on
March 16, 2001. Prior to joining PetMed Express, from November
2000 until March 2001, Mr. Akdag served as Chief Executive
Officer of International Cosmetics Marketing Co. d/b/a Beverly
Sassoon & Co., a publicly held (OTCBB: ICMK) direct sales company
distributing skin care and nutritional products. From May 1991
until August 2000, Mr. Akdag was employed by Lens Express, Inc.,
a direct sales company distributing replacement contact lenses,
serving as its President from May 1996 until August 2000, Chief
Executive Officer and a member of the Board of Directors from
August 1992 until May 1996, and Chief Financial Officer and a
member of the Board of Directors from May 1991 until August 1992.
On December 14, 1998, Netel Inc., a corporation in which Mr.
Akdag served as a member of the Board of Directors, filed a
Petition for Chapter 11 bankruptcy in the United States
Bankruptcy Court Southern District of Florida. The proceeding
was styled IN RE: NETEL, INC., CASE NO. 98-28929-BKC-PGH. On July
19, 1999, the Bankruptcy Court entered an Order Confirming an
Amended Chapter 11 Plan. On December 21, 1999, the Bankruptcy
Court entered a Final Decree, Discharge of Trustee, and closed
the case. Mr. Akdag holds a Bachelor of Science degree in
Business Administration with a major in finance from the
University of Florida where he graduated with high honors.
37
BRUCE ROSENBLOOM, age 34, was appointed Chief Financial Officer
on May 30, 2001. Mr. Rosenbloom served as the Manager of Finance
and Financial Reporting of Cooker Restaurant Corporation, a $147
million, 65 location, publicly held (OTCBB: CGRT) restaurant, in
West Palm Beach, Florida, from December 2000 until May 2001. Mr.
Rosenbloom's duties included all internal and external reporting
including all SEC filings and Annual Report to Shareholders. Mr.
Rosenbloom was a senior audit accountant for Deloitte & Touche
LLP, an international accounting firm, West Palm Beach, Florida,
from January 1996 until December 2000. Mr. Rosenbloom was
responsible for planning and conducting all aspects of audit
engagements for clients in various industries, including direct
marketing, healthcare, manufacturing, financial institutions, and
professional service firms. From August of 1992 to May of 1995,
Mr. Rosenbloom was an Account Executive for MCI
Telecommunications. Mr. Rosenbloom, a certified public
accountant, received a Bachelor of Science degree in Accounting
from Florida Atlantic University, Boca Raton, Florida in 1996 and
a Bachelor of Arts degree in Economics from the University of
Texas, Austin, Texas in 1992.
ROBERT C. SCHWEITZER, age 56, was the Regional President of Union
Planters Bank for Broward and Palm Beach County Florida markets
from April 1999 to December 2002. Prior to joining Union
Planters, Mr. Schweitzer served as the Executive VP and Head of
Commercial Banking for Barnett Bank/NationsBank in Jacksonville,
Florida from 1993 to 1999. Other positions held include Director
and Head of Real Estate Consulting for Coopers & Lybrand in
Washington, D.C.; Senior VP and Manager of Central North America
Real Estate for the First National Bank of Chicago, and Manager
of Domestic Credit Process Review; Senior VP & Manager of Central
North American Banking for Wachovia Bank. Mr. Schweitzer holds
an MBA from the University of North Carolina, and a Bachelor of
Science degree from the United States Naval Academy.
RONALD J. KORN, age 63, has been the President of Ronald Korn
Consulting, a business consulting firm, since 1991. He served as
the Managing Partner of KPMG, LLP's Miami office from 1985 to
1991. Mr. Korn held various positions including Partner with
KPMG, an international accounting firm, from 1961 until 1991. He
has served as a Director of TOUSA Homes, Inc. (formerly Engle
Homes, Inc.) since 1992, and a Director, Chairman of the Audit
Committee, and member of the Loan Committee of Horizon Bank, FSB
since 1999. He was appointed to serve as a Director of Ocwen
Financial Corporation (NYSE:OCN) on July 31, 2003. Mr. Korn
previously served as a Director and Chairman of the Audit
Committee of Vacation Break U.S.A., Inc. and Magicworks
Entertainment Corporation, and Non-Executive Chairman of Carole
Korn Interiors, Inc. Mr. Korn holds a Juris Doctor degree from
the New York University Law School and a Bachelor of Science
degree in Economics from the University of Pennsylvania, Wharton
School.
GIAN FULGONI, age 55, has been the Executive Chairman of ComScore
Networks, Inc. since 1999. From 1981 until 1998, Mr. Fulgoni
served as president and chief executive officer of Information
Resources, Inc. (IRIC: NASDAQ). He was a member of our Board of
Directors from August 1999 through November 2000. Mr. Fulgoni
currently serves as a member of the Board of Directors of Easter
Seals, Chicago. Mr. Fulgoni served on the Board of Directors of
Platinum Technology, Inc. from 1990 to 1999, U.S. Robotics, Inc.
from 1991 to 1994, and Yesmail.com, Inc. in 1999. Educated in
the U.K., Mr. Fulgoni holds a Masters degree in Marketing from
the University of Lancaster and a Bachelor of Science degree in
Physics from the University of Manchester.
FRANK J. FORMICA, age 59, has served as a member of our Board of
Directors since August 11, 2003. Mr. Formica has served as a
legal consultant and expert in corporate securities and
securities industry litigation and arbitration cases since 1999.
From 1969 until 1999, Mr. Formica held various positions with the
National Association of Securities Dealers ("NASD"), including
Director of the NASD's Congressional and State Liaison
Department, Director of the Corporate Finance Department, and
Vice President and Deputy General Counsel. Mr. Formica received
his J.D. degree from the Washington College of Law at American
University and an undergraduate degree from Ohio University. He
is a member of the New York State Bar.
38
There are no familial relationships between any of the executive
officers and directors.
On November 13, 2002, Messrs. Kenneth Jacobi and Huseyin
Kizanlikli resigned as members of our Board of Directors. The
resignations were not related to a disagreement with us on any
matter related to our operations, policies or practices. On
November 14, 2002 through November 19, 2002, we appointed four
new board members to our Board of Directors. Joining our Board
of Directors were Messrs. Robert C. Schweitzer, Ronald J. Korn,
Gian Fulgoni, and our Chief Executive Officer, Menderes Akdag.
On August 11, 2003, Guven Kivilcim resigned from our Board of
Directors and, on the same date, we appointed Frank J. Formica as
a new member of our Board. The resignation of Mr. Kivilcim was
not related to a disagreement with us on any matter related to
our operations, policies or practices.
Board of Directors
------------------
Each director is elected at our annual meeting of shareholders
and holds office until the next annual meeting of shareholders,
or until the successors are elected and qualified. At present,
our bylaws provide for not less than one director. Currently, we
have six directors. The bylaws permit the Board of Directors to
fill any vacancy and such director may serve until the next
annual meeting of shareholders or until his successor is elected
and qualified. Officers are elected by the Board of Directors and
their terms of office are, except to the extent governed by
employment contracts, at the discretion of the Board.
Compensation of Independent Directors
-------------------------------------
Each independent Director will be compensated $10,000 annually,
and receive stock options to purchase 30,000 shares of our common
stock, which will vest equally over a three year period, at an
exercise price per share equal to the fair market value on the
day of grant.
Committees of the Board of Directors
------------------------------------
The Board of Directors has established an audit committee and a
compensation committee, both of which are comprised of non-
employee independent directors. The compensation committee
establishes guidelines and standards relating to the
determination of executive compensation, reviews executive
compensation policies and recommends to our board of directors
compensation for our executive officers and other employees. Our
compensation committee also administers our stock incentive plan
and determines the number of shares covered by, and terms of,
options to be granted to executive officers and other employees
under this plan.
The audit committee recommends independent auditors, reviews
internal financial information, reviews audit reports and
management letters, participates in the determination of the
adequacy of the internal accounting control system, reviews the
results of audits with independent auditors, oversees quarterly
and yearly reporting, and is responsible for policies,
procedures, and other matters relating to business integrity,
ethics and conflicts of interests. The members of the
compensation and audit committees are Messrs. Schweitzer, Korn,
and Fulgoni.
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
No member of our compensation committee serves or in the past has
served as a member of another entity's board of directors or
compensation committee, which entity has one or more executive
officers serving as a member of our board of directors or
compensation committee.
39
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term
compensation paid by us for services performed on our behalf for
the last three completed fiscal years ended March 31, 2003, 2002
and 2001, with respect to our chief executive officer and other
executive officers serving as such who earned compensation
greater than $100,000 in these fiscal years:
Summary Compensation Table
-------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
--------------------------------- --------------------------------------
Awards Payouts
--------------------------------------
Securities
Name and Other Underlying LTIP All Other
Principal Annual Options/ Payouts Compensation
Position Year Salary Bonus Compensation($) SARs (#) ($) ($)
------------------------------------------------------------------------------------------------------------
Marc Puleo, M.D., 2003 $100,000 50,000 - 240,000 - -
Chairman of the Board 2002 88,462 - - - - -
and President 2001 85,000 15,000 - 200,000 - -
Menderes Akdag, 2003 200,000 - - - - -
Chief Executive Officer 2002 176,923 - - - - -
and Director 2001 6,000 - - 750,000 - -
Bruce S. Rosenbloom, 2003 100,000 500 - - - -
Chief Financial Officer 2002 77,962 - - 75,000 - -
2001 - - - - - -
Employment Agreements
---------------------
On March 16, 2001, we entered into an employment agreement with
Menderes Akdag to serve as our Chief Executive Officer. Under
the terms of this three-year agreement we will pay Mr. Akdag an
annual salary of $150,000 for the first six months of the
agreement, and thereafter his annual salary will be increased to
$200,000. We can terminate the employment of Mr. Akdag either
upon mutual consent or for cause. If we should terminate Mr.
Akdag for cause, or if Mr. Akdag should terminate the agreement
without "good reason" as described in the employment agreement,
no severance benefits shall be paid. If we should terminate Mr.
Akdag without cause, we must give Mr. Akdag three months notice
and continue to compensate him under the terms of this employment
agreement during those three months. At the end of the three-
month period, we must pay Mr. Akdag severance benefits equal to
the annual base salary of the executive, and any previously
granted but unvested options shall immediately vest. The
agreement can be terminated upon the mutual consent of the
parties, or upon 90 days notice by us during which time we shall
continue to compensate him under the terms of his employment
agreement. We also granted Mr. Akdag options to purchase 750,000
shares of our common stock under our 1998 Stock Option Plan at an
exercise price of $.32 per share, which vest at the rate of
187,500 options on each of March 16, 2001, 2002, 2003 and 2004,
exercisable for a period of three years from the date of vesting.
The employment agreement contains customary non-disclosure
provisions, as well as a non-competition restriction for a period
of 18 months following the termination of the agreement.
40
On May 1, 2000, we entered into a two-year employment agreement
with Marc Puleo, M.D., as Chief Executive Officer, which provided
for annual cash compensation to him of $150,000. On November 8,
2000, Dr. Puleo's employment agreement dated May 1, 2000 was
amended to reflect a salary of $75,000 annually. Under the terms
of the employment agreement Dr. Puleo received an annual salary
of $75,000, subject to increase no less frequent than an annual
review by our board of directors. Dr. Puleo's salary was
increased to $100,000 in fiscal 2002, and then increased to
$150,000 in May 2003. We can terminate the employment of Dr.
Puleo either upon mutual consent or for cause. If we should
terminate Dr. Puleo for cause, or if Dr. Puleo should terminate
the agreement without "good reason" as described in the
employment agreement, no severance benefits shall be paid. If we
should terminate Dr. Puleo without cause, we must give Dr. Puleo
three months notice and continue to compensate him under the
terms of this employment agreement during those three months. At
the end of the three-month period, we must pay Dr. Puleo
severance benefits equal to the annual base salary of the
executive, and any previously granted but unvested options shall
immediately vest. If we should terminate Dr. Puleo for cause, as
defined in employment agreement, no severance benefits shall be
paid. The agreement can be terminated upon the mutual consent of
the parties, or upon 90 days notice by us during which time we
shall continue to compensate him under the terms of his
employment agreement, or his contract will renew annually.
Option/SAR Grants in Last Fiscal Year
-------------------------------------
The following table includes information as to the grant of
options to purchase shares of common stock during the fiscal year
ended March 31, 2003 to each person named in the Summary
Compensation Table:
Individual Grants
------------------------------------------------------------ Potential Realized
Number of Percent of Value at Assumed
Securities Total Options/ Annual Rates of Stock
Underlying SARs granted Exercise or Price Appreciation
Options/SARS to Employees Base Price Expiration for Option Term
Name Granted (#) in Fiscal Year ($/share) Date 5% 10%
---------------------------------------------------------------------------------------------------------
Marc Puleo, M.D. 240,000 (a) 100% $ 1.05 05/20/06 306,308 368,953
Menderes Akdag - - - - - -
Bruce S. Rosenbloom - - - - - -
(a) We granted Dr. Puleo options to purchase 240,000 shares of
our common stock on May 20, 2002, under the 1998 Stock
Option Plan: 240,000 options at an exercise price of $1.05
per share which vest at the rate of 80,000 options on each
of May 20, 2003 2004, and 2005.
41
Option Exercises and Holdings
-----------------------------
The following table sets forth, as of March 31, 2003, the number
of stock options and the value of unexercised stock options held
by the Named Executive Officers and the exercises of stock
options during the year ended March 31, 2003 by the Named
Executive Officers:
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END
STOCK OPTION VALUES
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired on Value Options at Fiscal Year End (#) at Fiscal Year End ($) (1)
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
----------------------------------------------------------------------------------------------------------------
Marc Puleo, M.D. 300,000 $ 207,000 1,400,000 240,000 $ 1,734,000 $ 314,400
Menderes Akdag 375,000 648,750 187,500 187,500 382,500 382,500
Bruce S. Rosenbloom - - 25,000 50,000 24,333 48,667
(1) Represents the difference between the closing price of
($2.36) of our Common stock on March 31, 2003, the last
trading day of our 2003 fiscal year, and the exercise of
the options.
EQUITY COMPENSATION PLAN INFORMATION
The following table reflects certain information about our common
stock that may be issued upon the exercise of options under our
existing 1998 stock option plan as of August 12, 2003:
(a) (b) (c)
Number of securities remaining
Number of securities to Weighted average available for future issuance
to be issued upon exercise exercise price of under equity compensation
of outstanding options, outstanding options, plans (excluding securities
Plan category warrants, and rights warrants and rights reflected in column (a))
--------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 2,075,103 $ 1.38 2,924,897
Equity compensation plans not
approved by security holders 45,000 $ 1.33 -
--------- ---------
Total 2,120,103 2,924,897
========= =========
42
1998 Stock Option Plan
----------------------
Our 1998 Stock Option Plan, adopted July 1998, provides for the
grant of options to purchase up to 5 million shares to key
employees, including officers, and to non-employee directors and
consultants. The purpose of this plan is to attract and retain
persons eligible to participate in the plan, motivate
participants to achieve our long-term goals by further aligning
the interests of participants with those of our shareholders
through compensation that is directly linked to the profitability
of our business and increases in shareholder value. These options
are intended to qualify either as incentive stock options within
the meaning of Section 422 of the Internal Revenue Code, or as
non-statutory stock options, which are options that are not
intended to meet the requirements of that section of the Internal
Revenue Code.
The plan is administered by the compensation committee. Under the
plan, our compensation committee has the authority to determine:
the persons to whom options will be granted, the number of shares
to be covered by each option, exercise price of each option,
whether the options granted are intended to be incentive stock
options, the manner of exercise, and the time, manner and form of
payment upon exercise of an option.
Incentive stock options granted under the plan may not be granted
at a price less than the fair market value of our common stock on
the date of grant (or less than 110% of the fair market value in
the case of employees holding 10% or more of our voting stock).
Non-statutory options may be granted at an exercise price
established by our board of directors, but cannot be less than
par value per share ($.001) of our common stock. Incentive stock
options granted under the plan must expire not more than 10 years
from the date of grant, and not more than five years from the
date of grant in the case of incentive options granted to an
employee who holds 10% or more of our voting stock.
As of August 12, 2003, options to purchase 2,075,103 shares of
our common stock, at exercise prices ranging from $.32 to $8.00
per share, were outstanding under the Plan.
CERTAIN TRANSACTIONS
Guven Kivilcim, a member of our board of directors from November
2000 to August 11, 2003, has an interest in Intelligent Switching
& Software LLC, and Numind Software Systems, Inc., with which we
conducted business with during the fiscal years ended March 31,
2003 and 2002. Intelligent Switching & Software LLC provided us
with long distance telecommunication services, and Numind
Software Systems, Inc. provided us with Internet and website
design and hosting services. We paid $154,000 and $64,000 to
Intelligent Switching & Software LLC, and $45,000 and $0 to
Numind Software Systems, Inc., for services during the fiscal
years ended March 31, 2003 and 2002, respectively. We owed $5,000
and $64,000 to Intelligent Switching & Software LLC, and $14,000
and $37,000 to Numind Software Systems, Inc., which were included
in our accounts payable balance as of March 31, 2003 and 2002,
respectively. As of approximately December 31, 2002, we no
longer conduct business with these companies.
We believe that transactions with our officers, directors and
principal shareholders, and companies they are affiliated with,
have been made upon terms no less favorable to us than we might
receive from unaffiliated third parties. We have adopted a policy
whereby all transactions between us and one or more of our
affiliates must be approved in advance by a majority of our
disinterested directors.
43
PRINCIPAL SHAREHOLDERS
The following table shows certain information known to us
regarding our common stock beneficially owned at August 12, 2003,
by:
* each person who is known by us to own beneficially or
exercise voting or dispositive control over 5% or more
of our common stock,
* each our executive officers and directors, and
* all executive officers and directors as a group.
Under securities law, a person is considered a beneficial owner
of any securities that the person has the right to acquire
beneficial ownership of within 60 days. Except as otherwise
indicated, we have been informed that the persons identified in
the table have sole voting and dispositive power with respect to
their shares.
This table is based upon 19,349,458 shares of common stock
outstanding at August 12, 2003, and does not give effect to:
* the issuance of up to 4,822,603 shares that would be
issued in the event outstanding options and warrants
are exercised and upon the conversion of convertible
preferred stock, except with respect to beneficial
ownership of shares attributed to the named person.
Unless otherwise indicated below, the address for each person is
1441 SW 29 Avenue, Pompano Beach, Florida 33069.
Name Number of Shares Percent of Shares
of Beneficial Owner Beneficially Owned Outstanding
------------------- ------------------ -----------------
Tricon Holdings, LLC 9,542,500 (a) 44.4%
Marc Puleo, M.D. 2,743,450 (b) 13.6%
Guven Kivilcim 2,167,200 (c) 10.9%
International Consultants, LLC 1,111,000 (d) 5.7%
Menderes Akdag 537,500 (e) 2.8%
Bruce S. Rosenbloom 40,267 (f) *
Robert C. Schweitzer 2,000 (g) *
Ronald J. Korn - (g) -
Gian Fulgoni - (g) -
Frank J. Formica - (h) -
All executive officers
and directors as a group
(seven persons) 3,323,217 (i) 16.2%
-------------
* Less than 1% of the issued and outstanding shares.
44
(a) Tricon Holdings, LLC, ("Tricon") holdings include
2,160,000 shares issuable upon exercise of warrants at
$.33 per share, until November 2005. Emel Yesil is the
sole manager of Tricon. Creslin Limited ("Creslin") is
the sole member (shareholder) of Tricon. Mr. Robert G.
Guest is the officer, and Mr. Guest and Christopher J.
Pitaluga are the directors of Creslin. Creslin Limited
Trust owns 99% of Creslin. Abacus Trustees (Gibraltar)
Limited is the trustee and Mustafa Yesil is the
beneficiary of the Creslin Limited Trust. Emel Yesil is
the daughter of Mustafa Yesil. The address for Tricon is
1020 N.W. 163rd Drive, Miami, FL 33169.
(b) Dr. Puleo's holdings include 1,863,450 shares of our
common stock held by Marpul Trust, a trust established by
Dr. Puleo under an agreement dated September 3, 1999 and
of which he is the beneficiary. Southpac Trust
International, Inc. is a trustee of Marpul Trust. Dr.
Puleo's holdings also include vested options held by him
to purchase 600,000 shares of common stock at $1.25 per
share until May 2008, 200,000 shares of common stock at
$.35 per share until March 2006, and 80,000 shares of
common stock at $1.05 per share until May 2006, but
exclude options to purchase an additional 160,000 shares
of common stock at $1.05, which have not vested yet.
(c) Mr. Kivilcim holdings include 540,000 shares of our
common stock issuable upon the exercise of warrants at
$.33 per share, until November 2005. The address for Mr.
Kivilcim is 436 Alamanda Drive, Hallandale, FL 33009.
(d) As reflected on the Schedule 13G, which was filed with
the Securities and Exchange Commission on September 25,
2002. The address for International Consultants, LLC is
45 Grand Bay Drive, Key Biscayne, FL 33149.
(e) Mr. Akdag's holdings include vested options to purchase
187,500 shares of our common stock at $.32 per share until
March 2006, but exclude options to purchase an additional
187,500 shares of our common stock at $.32 per share,
which have not yet vested.
(f) Mr. Rosenbloom's holdings include options to purchase
16,667 shares of our common stock at $1.65 per share
until May 2005, 16,667 shares of our common stock at $1.65
per share until May 2006, and 833 shares of our common
stock at $.86 per share until March 2006, but exclude
options to purchase an additional 16,666 shares of our
common stock at $1.65 per share, 16,667 shares of our
common stock at $.86 per share, and 15,000 shares of our
common stock at $3.45 per share which have not yet vested.
(g) Each of Mr. Schweitzer's, Mr. Korn's, and Mr. Fulgoni's
holdings exclude options to purchase an additional 30,000
shares of our common stock at $1.90 per share, which have
not yet vested.
(h) Mr. Formica's holdings exclude options to purchase 30,000
shares of our common stock at $7.90 per share, which have
not yet vested.
(i) Incorporates (a) through (h) above.
45
DESCRIPTION OF SECURITIES
As of August 12, 2003, we had authorized 40,000,000 shares of par
value $0.001 common stock, with 19,349,458 shares issued and
outstanding. Additionally, we have authorized 5,000,000 shares of
preferred stock, with 2,500 shares issued and outstanding.
Common stock
------------
The holders of Common stock are entitled to one vote for each
share held of record on all matters to be voted on by
shareholders. There is no cumulative voting with respect to the
election of directors, with the result that the holders of more
than 50% of the shares voted for the election of directors can
elect all of the directors. The holders of Common stock are
entitled to receive dividends when, as and if declared by the
Board of Directors out of funds legally available therefor. In
the event of our liquidation, dissolution or winding up, the
holders of Common stock are entitled to share ratably in all
assets remaining available for distribution to them after payment
of liabilities and after provision has been made for each class
of stock, if any, having preference over the Common stock.
Holders of shares of Common stock, as such, have no conversion,
preemptive or other subscription rights, and there are no
redemption provisions applicable to Common stock. All of the
outstanding shares of Common stock are, and the shares of Common
stock offered hereby, will be duly authorized, validly issued,
fully paid and nonassessable.
Preferred Stock
---------------
We are authorized to issue 5,000,000 shares of Preferred Stock
with such designation, rights and preferences as may be
determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without
shareholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders
of the Common stock. In the event of issuance, the Preferred
Stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control.
In April 1998, we designated 250,000 shares of our $.001 par
value preferred stock as "Convertible Preferred Stock". On the
same date, we issued all 250,000 shares at a price of $4.00 per
share.
The designations, rights and preference of the Convertible
Preferred Stock provide that:
* each share may pay dividends at our sole discretion; we have
not paid, and do not anticipate paying in the foreseeable
future, dividends on the Convertible Preferred Stock;
* in the event of the liquidation or winding up of PetMed,
each share has a liquidation value of $4.00 plus all accrued
but unpaid dividends, if any, are entitled to receive a
liquidating distribution before any distribution may be made
to holders of our common stock and other Series of our
preferred stock;
* the holders of the shares of Convertible Preferred Stock are
entitled to one vote per share on all matters submitted to a
vote of our shareholders;
* the shares are not redeemable;
* each share is convertible into approximately 4.05 shares of
our common stock at any time at the option of the holder;
and
* the shares have certain anti-dilution protections.
As of August 12, 2003, 2,500 shares of the Convertible Preferred
Stock remained unconverted and outstanding.
46
Common Stock Purchase Warrants
------------------------------
In connection with our sale and issuance of our shares of common
stock on November 22, 2000, we issued common stock purchase
warrants to Tricon Holdings, LLC to purchase an aggregate of
3,000,000 shares of our common stock. Resale of the shares of
our common stock issuable upon exercise of these warrants is
covered by this prospectus. The warrants are exercisable:
* at a price of $.33 per share; and
* during the five year period terminating November 22, 2005.
The number of shares issuable upon exercise of the warrants, and
the exercise price, is subject to adjustment in the event of:
* subdivisions, combinations, stock dividends, mergers and/or
reclassifications of our common stock;
* mergers;
* certain distributions on account of our common stock; and/or
* our issuance of additional common stock at less than the
exercise price of the warrants on the date of issuance or
less than the closing price per share of our common stock on
the date of issuance.
Transfer Agent
--------------
The Transfer Agent for our shares of common stock is Florida
Atlantic Stock Transfer, Inc. ("FAST"), 7130 Nob Hill Road,
Tamarac, Florida 33321. The telephone number for FAST is (954)
726-4954.
SELLING SHAREHOLDERS
Overview
--------
This prospectus relates to the periodic offers and sales of up to
12,590,985 shares of common stock by the selling security holders
listed below and their pledgees, donees and other successors in
interest. Common shares registered for resale under this
prospectus constitute 57% of our issued and outstanding common
shares as of August 12, 2003, assuming the exercise of the
warrants and options by the selling shareholders, which includes:
* 9,845,985 shares of our common stock; and
* 2,745,000 shares of our common stock issuable upon the
exercise of outstanding warrants, including:
* 2,700,000 shares at an exercise price of $.33 per
share. In November, 2000 we sold 10,000,000 shares
of common stock and five year warrants to purchase
3,000,000 shares of our common stock at an exercise
price of $.33 per share to an accredited investors
in a private placement exempt from registration
under the Securities Act of 1933, as amended
("Securities Act") in reliance on exemptions
provided in Section 4(2) and Regulation D promulgated
thereunder. We received gross proceeds of $2,000,000
from this transaction.
47
* 45,000 shares at an exercise price of $1.33 per share.
In April 1998, we issued non-plan options to purchase a
total of 91,500 shares of our common stock, of which
46,500 have been exercised, at an exercise price of
$1.33 per share to an employee in a private transaction
exempt from registration under the Securities Act in
reliance on exemptions provided in Section 4(2).
The following table sets forth:
* the name of each selling security holder;
* the amount of common stock owned beneficially by each
selling security holder (which includes those shares
underlying options and warrants);
* the number of shares that may be offered by each selling
shareholder pursuant to this prospectus;
* the number of shares to be owned by each selling shareholder
following sale of the shares covered by this prospectus; and
* the percentage of our common stock to be owned by each
selling security holder following sale of the shares covered
by this prospectus (based on 19,349,458 shares of our common
stock outstanding as of the date of this prospectus), as
adjusted to give effect to the issuance of shares upon the
exercise of the named selling shareholder's warrants, but no
other person's warrants.
If, and when, the warrants and non-plan options are exercised by
the selling shareholders, the proceeds of $950,850 from the
exercise shall be used by us for general corporate purposes. The
costs of registering the shares offered by the selling
shareholders are being paid by us. The selling shareholders will
pay all other costs of the sale of the shares offered by them.
Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or investment power with
respect to outstanding voting securities, as well as any voting
securities which the person has the right to acquire within 60
days, through the conversion or exercise of any security or other
right. The information as to the number of shares of our common
stock owned by each selling security holder is based upon our
books and records and the information provided by our transfer
agent.
We may amend or supplement this prospectus, from time to time, to
update the disclosure set forth in the table. All of the shares
being registered for resale under this prospectus for the selling
security holders may be offered hereby. Because the selling
security holders identified in the table may sell some or all of
the shares owned by them which are included in this prospectus,
and because there are currently no agreements, arrangements or
understandings with respect to the sale of any of the shares, no
estimate can be given as to the number of shares available for
resale hereby that will be held by the selling security holders
upon termination of this offering. We have, therefore, assumed
for the purposes of the following table, that the selling
security holders will sell all of the shares owned beneficially
by them, which are covered by this prospectus, but will not sell
any other shares of our common stock that they presently own.
48
Number of Shares Number of Number of Percent
Name of Selling Beneficially Owned Shares to be Shares Owned After
Security Holder and to be Owned Offered After Offering Offering
--------------------------------------------------------------------------------------------
Adam Terris 93,167 (1) 73,167 (1) 20,000 *
Wayne Horne 535,500 335,293 200,207 1.03%
Nico Pronk 583,153 335,293 247,860 1.28%
Mike Cerisano 98,949 98,949 - *
J.W. Genesis Capital
Markets, Inc. 59,583 (2) 59,583 (2) - *
Tricon Holdings, LLC 9,542,500 (3) 9,542,500 (3) - *
Guven Kivilcim 2,167,200 (4) 2,146,200 (4) 21,000 *
------------------
* less than 1%
(1) Includes 45,000 shares of common stock underlying an option
exercisable at $1.33 per share. The option expires on April
7, 2004.
(2) In August 2003, J.W. Genesis Capital Markets, Inc. exercised
75,000 warrants under a cashless exercisable formula into
59,583 shares of our common stock.
(3) Includes 2,160,000 shares of common stock underlying a
warrant exercisable at $.33 per share. The warrant expires
on November 22, 2005.
(4) Mr. Kivilcim was a member of our board of directors from
November 2000 to August 11, 2003. Includes 540,000 shares
of common stock underlying a warrant exercisable at $.33 per
share. The warrant expires on November 22, 2005.
PLAN OF DISTRIBUTION
The shares offered hereby by the selling security holders may be
sold from time to time by the selling security holders, or by
pledgees, donees, transferees or other successors in interest.
These sales may be made on one or more exchanges or in the
over-the-counter market, or otherwise at prices and at terms then
prevailing or at prices related to the then current market price,
or in negotiated transactions. The shares may be sold by one or
more of the following methods, including, without limitation:
* a block trade in which the broker-dealer so engaged will
attempt to sell the shares as agent, but may position and
resell a portion of the block as principal to facilitate
the transaction;
* purchases by a broker or dealer as principal and resale by a
broker or dealer for its account under this prospectus;
* ordinary brokerage transactions and transactions in which
the broker solicits purchasers;
* face-to-face or other direct transactions between the
selling security holders and purchasers without a broker-
dealer or other intermediary; and
* ordinary brokerage transactions and transactions in which
the broker solicits purchasers.
49
In effecting sales, brokers or dealers engaged by the selling
security holders may arrange for other brokers or dealers to
participate in the resales. Brokers, dealers or agents may
receive compensation in the form of commissions, discounts or
concessions from selling security holders in amounts to be
negotiated in connection with the sale. The selling security
holders and these broker-dealers and agents and any other
participating broker-dealers, or agents may be deemed to be
"underwriters" within the meaning of the Securities Act, in
connection with the sales. In addition, any securities covered by
this prospectus that qualify for sale under Rule 144 might be
sold under Rule 144 rather than under this prospectus.
In connection with distributions of the shares or otherwise, the
selling security holders may enter into hedging transactions with
broker-dealers. In connection with the transactions,
broker-dealers may engage in short sales of the shares registered
hereunder in the course of hedging the positions they assume with
selling security holders. The selling security holders may also
sell shares short and deliver the shares to close out the
positions. We have been advised by each of the selling security
holders that they do not have any open short positions in our
common stock as of the date of this prospectus. The selling
security holders may enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of
the shares registered hereunder, which the broker-dealer may
resell under this prospectus. The selling security holders may
also pledge the shares registered hereunder to a broker or dealer
and upon a default, the broker or dealer may affect sales of the
pledged shares under this prospectus.
Information as to whether an underwriter(s) who may be selected
by the selling security holders, or any other broker-dealer, is
acting as principal or agent for the selling security holders,
the compensation to be received by underwriters who may be
selected by the selling security holders, or any broker-dealer,
acting as principal or agent for the selling security holders and
the compensation to be received by other broker-dealers, in the
event the compensation of other broker-dealers is in excess of
usual and customary commissions, will, to the extent required, be
set forth in a supplement to this prospectus. Any dealer or
broker participating in any distribution of the shares may be
required to deliver a copy of this prospectus, including the
supplement, if any, to any person who purchases any of the shares
from or through a dealer or broker.
We have advised the selling security holders that during the time
as they may be engaged in a distribution of the shares included
herein they are required to comply with Regulation M of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
With certain exceptions, Regulation M precludes any selling
security holders, any affiliated purchasers and any broker-dealer
or other person who participates in the distribution from bidding
for or purchasing, or attempting to induce any person to bid for
or purchase any security which is the subject of the distribution
until the entire distribution is complete. Regulation M also
prohibits any bids or purchase made in order to stabilize the
price of a security in connection with an at the market offering
such as this offering. All of the foregoing may affect the
marketability of our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
As of August 12, 2003, we have 19,349,458 shares of common stock
issued and outstanding. This does not include shares that may be
issued upon exercise of options or warrants. We cannot predict
the effect, if any, that market sales of common stock or the
availability of these shares for sale will have on the market
price of our shares from time to time. Nevertheless, the
possibility that substantial amounts of common stock may be sold
in the public market could negatively damage and affect market
prices for our common stock and could damage our ability to raise
capital through the sale of our equity securities.
50
LEGAL MATTERS
The validity of the securities offered by this prospectus will be
passed upon for us by Katz, Barron, Squitero, Faust & Boyd, P.A.,
100 N.E. Third Avenue, Suite 280, Fort Lauderdale, Florida 33301.
EXPERTS
The consolidated financial statements of PetMed Express, Inc. as
of March 31, 2003, and for each of the three years then ended,
appearing in this prospectus and registration statement have been
audited by Goldstein Golub Kessler LLP, independent auditors, as
set forth in their report thereon appearing elsewhere in this
prospectus, and are included in reliance upon this report given
on the authority of such firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
We have filed with the SEC the registration statement on Form S-1
under the Securities Act for the common stock offered by this
prospectus. This prospectus, which is a part of the registration
statement, does not contain all of the information in the
registration statement and the exhibits filed with it, portions
of which have been omitted as permitted by SEC rules and
regulations. For further information concerning us and the
securities offered by this prospectus, we refer to the
registration statement and to the exhibits filed with it.
Statements contained in this prospectus as to the content of any
contract or other document referred to are not necessarily
complete. In each instance, we refer you to the copy of the
contracts and/or other documents filed as exhibits to the
registration statement, and these statements are qualified in
their entirety by reference to the contract or document.
The registration statement, including all exhibits, may be
inspected without charge at the SEC's Public Reference Room at
450 Fifth Street, N.W. Washington, D.C. 20549, and at the SEC's
regional offices located at New York, New York and Chicago,
Illinois. You may request copies of these documents by writing
to the Securities and Exchange Commission and paying the required
fee for copying. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for more information about the
operation of their public reference rooms. Copies of our filings
are also available at the SEC website at http://www.sec.gov.
The registration statement, including all exhibits and schedules
and amendments, has been filed with the SEC through the
Electronic Data Gathering, Analysis and Retrieval system.
Following the effective date of the registration statement
relating to this prospectus, we will continue to be subject to
the reporting requirements of the Exchange Act and in accordance
with these requirements, will continue to file annual, quarterly
and special reports, and other information with the SEC. We also
intend to furnish our shareholders with annual reports containing
audited financial statements and other periodic reports as we
think appropriate or as may be required by law.
Copies of our SEC filings and other information about us are also
available on our website at www.1800PetMeds.com. The information
on our website is neither incorporated into, nor a part of, this
prospectus.
51
PETMED EXPRESS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Fiscal Years Ended 2003, 2002 and 2001
--------------------------------------
Independent Auditor's Report................................ F-2
Consolidated Balance Sheets as of March 31, 2003 and 2002... F-3
Consolidated Statements of Operations for the three years
ended March 31, 2003...................................... F-4
Consolidated Statements of Changes in Shareholders'
Equity for each of the three years in the period ended
March 31, 2003............................................ F-5
Consolidated Statements of Cash Flows for the three years
ended March 31, 2003...................................... F-6
Notes to Consolidated Financial Statements..................F-7-F-17
Three months ended June 30, 2003 and 2002
-----------------------------------------
Condensed Consolidated Balance Sheets as of June 30, 2003
and March 31, 2003........................................ F-18
Condensed Consolidated Statements of Income for the three
months ended June 30, 2003 and 2002....................... F-19
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 2003 and 2002................. F-20
Notes to Condensed Consolidated Financial Statements
for the three months ended June 30 2003 and 2002..........F-21-F-24
F-1
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
PetMed Express, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
PetMed Express, Inc. and Subsidiaries (the "Company") as of March
31, 2003 and 2002, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each
of the three years in the period ended March 31, 2003. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of PetMed Express, Inc. and Subsidiaries as of
March 31, 2003 and 2002, and the results of their operations and
their cash flows for each of the three years in the period ended
March 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
May 10, 2003 /s/Goldstein Golub Kessler LLP
New York, New York -------------------------------
Goldstein Golub Kessler LLP
F-2
PETMED EXPRESS, INC. AND SUBISIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
2003 2002
----------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 984,169 $ 737,284
Accounts receivable, less allowance for
doubtful accounts of $16,644 and $7,475,
respectively 651,883 291,513
Inventories 4,268,146 2,306,620
Prepaid expenses and other current assets 478,108 148,608
----------- ------------
Total current assets 6,382,306 3,484,025
Property and equipment, net 1,496,979 1,120,056
Deferred income taxes 581,356 -
Intangible asset 365,000 -
Other assets 200,155 50,155
----------- ------------
Total assets $ 9,025,796 $ 4,654,236
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses 3,296,223 2,724,995
Current portion of loan obligation 68,442 68,442
----------- ------------
Total current liabilities 3,364,665 2,793,437
Line of credit - 141,214
Loan obligation, less current portion 68,443 136,885
----------- ------------
Total liabilities 3,433,108 3,071,536
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized; 2,500 convertible shares
issued and outstanding with a liquidation
preference of $4 per share 8,898 8,898
Common stock, $.001 par value, 40,000,000
shares authorized; 18,460,878 and 16,360,010
shares issued and outstanding, respectively 18,461 16,360
Additional paid-in capital 7,279,207 6,528,885
Accumulated deficit (1,713,878) (4,971,443)
----------- ------------
Total shareholders' equity 5,592,688 1,582,700
----------- ------------
Total liabilities and shareholders' equity 9,025,796 4,654,236
=========== ============
See accompanying notes to consolidated financial statements.
F-3
PETMED EXPRESS, INC. AND SUBISIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
Sales $ 54,974,916 $ 32,025,931 $ 10,006,285
Cost of sales 31,517,639 18,894,493 6,367,604
------------ ------------ ------------
Gross profit 23,457,277 13,131,438 3,638,681
Operating expenses:
General and administrative 7,956,786 6,094,493 4,506,509
Advertising 11,649,811 5,717,242 1,397,418
Severance charges - 195,000 -
Depreciation and amortization 367,673 376,763 373,852
------------ ------------ ------------
Total operating expenses 19,974,270 12,383,498 6,277,779
------------ ------------ ------------
Income (loss) from operations 3,483,007 747,940 (2,639,098)
------------ ------------ ------------
Other income (expense):
Adjustment of estimate for legal
settlement - 345,000 -
Gain (loss) on disposal of property
and equipment 15,000 (314,332) -
Interest expense (30,658) (48,835) (231,414)
Interest income 6,973 18,582 52,922
Other, net 6,084 77,058 (9,117)
------------ ------------ ------------
Total other income (expense) (2,601) 77,473 (187,609)
------------ ------------ ------------
Income (loss) before provision for
income taxes 3,480,406 825,413 (2,826,707)
Provision for income taxes 222,841 - -
------------ ------------ ------------
Net income (loss) $ 3,257,565 $ 825,413 $ (2,826,707)
============ ============ ============
Net income (loss) per common share:
Basic $ 0.19 $ 0.05 $ (0.28)
============ ============ ============
Diluted $ 0.16 $ 0.04 $ (0.28)
============ ============ ============
Weighted average number of common
shares outstanding:
Basic 17,300,130 16,360,010 9,943,625
============ ============ ============
Diluted 20,749,515 19,739,493 9,943,625
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended March 31, 2001, 2002 and 2003
Convertible
Preferred Stock Common Stock Additional
------------------ ------------------------ Paid-In Accumulated
Shares Amounts Shares Amounts Capital Deficit Total
------ -------- ---------- --------- ------------ ------------- ------------
Balance, March 31, 2000 6,250 $ 22,246 6,369,822 $ 6,370 $ 4,572,385 (2,970,149) $ 1,630,852
Conversion of convertible
preferred stock into
common stock (3,750) (13,348) 15,188 15 13,333 - -
Sale of common stock, net
of issuance costs - - 10,000,000 10,000 1,944,142 - 1,954,142
Purchase and Retirement
of treasury stock - - (25,000) (25) (975) - (1,000)
Net loss - - - - - (2,826,707) (2,826,707)
------ -------- ---------- --------- ------------ ------------- ------------
Balance, March 31, 2001 2,500 8,898 16,360,010 16,360 6,528,885 (5,796,856) 757,287
Net income - - - - - 825,413 825,413
------ -------- ---------- --------- ------------ ------------- ------------
Balance, March 31, 2002 2,500 8,898 16,360,010 16,360 6,528,885 (4,971,443) 1,582,700
Issuance of common
stock from exercise of
stock options - - 1,018,833 1,019 304,360 - 305,379
Issuance of common
stock from exercise of
warrants - - 1,082,035 1,082 274,375 - 275,457
Tax benefit related to
stock options exercised - - - - 171,587 - 171,587
Net income - - - - - 3,257,565 3,257,565
------ -------- ---------- --------- ------------ ------------- ------------
Balance, March 31, 2003 2,500 $ 8,898 18,460,878 $ 18,461 $ 7,279,207 $ (1,713,878) $ 5,592,688
====== ======== ========== ========= ============ ============= ============
See accompanying notes to consolidated financial statements.
F-5
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 3,257,565 $ 825,413 $ (2,826,707)
Adjustments to reconcile net income
loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 367,673 376,763 373,852
Tax benefit related to stock options
exercised 171,587 - -
Amortization of deferred membership
fee revenue - (140,048) (462,139)
(Gain) loss on disposal of property
and equipment (15,000) 314,332 -
Bad debt expense 15,027 6,862 (19,007)
Deferred income taxes (581,356) - -
(Increase) decrease in operating
assets and liabilities:
Accounts receivable (375,397) (135,907) 44,412
Inventories (1,961,526) (1,675,226) 1,121,302
Prepaid expenses and other
current assets (329,500) (126,494) 328,430
Other assets (150,000) (42,500) 11,429
Accounts payable and accrued
expenses 571,228 1,072,829 64,485
Deferred membership fee revenue - - 328,789
------------ ------------ ------------
Net cash provided by (used in)
operating activities 970,301 476,024 (1,035,154)
------------ ------------ ------------
Cash flows from investing activities:
Net proceeds from the sale of propert
and equipment 15,000 2,016,921 -
Purchases of property and equipment (744,596) (555,645) (241,888)
Certificate of deposit - - 300,000
Purchase of intangible asset (365,000) - -
------------ ------------ ------------
Net cash (used in) provided by
investing activities (1,094,596) 1,461,276 58,112
------------ ------------ ------------
Cash flows from financing activities:
Payments on mortgage payable - (1,566,833) (65,079)
Payments on capital lease obligations - (247,209) (179,183)
(Payments) borrowings on loan agreement (68,442) 205,327 -
Payments on line of credit agreement (141,214) - (634,985)
Net proceeds from sale of common stock - - 1,954,142
Purchase and retirement of treasury stock - - (1,000)
Proceeds from the exercise of stock
options and warrants 580,836 - -
------------ ------------ ------------
Net cash provided by (used in)
financing activities 371,180 (1,608,715) 1,073,895
------------ ------------ ------------
Net increase in cash and cash equivalents 246,885 328,585 96,853
Cash and cash equivalents, at beginning
of year 737,284 408,699 311,846
------------ ------------ ------------
Cash and cash equivalents, at end of year $ 984,169 $ 737,284 $ 408,699
============ ============ ============
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 30,675 $ 29,150 $ 239,007
============ ============ ============
Cash paid for income taxes $ 508,000 $ - $ -
============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Organization
PetMed Express, Inc. and its subsidiaries, d/b/a 1-800-
PetMeds, (the "Company") is a leading nationwide pet
pharmacy. The Company markets prescription and non-
prescription pet medications, along with health and
nutritional supplements, for cats and dogs direct to the
consumer.
The Company markets its products through national
television, on-line and direct mail advertising campaigns,
which aim to increase the recognition of the "1-800-PetMeds"
brand name, increase traffic on its web site at
www.1800PetMeds.com , acquire new customers, and maximize
repeat purchases. The majority of all of the Company's sales
are to residents of the United States. The Company's
executive offices are located in Pompano Beach, Florida.
During the fiscal year ended March 31, 2001, the Company
formed two wholly owned subsidiaries. One company was
formed to assist in the purchasing of products and the other
for advertising. The Company's fiscal year end is March 31.
References herein to fiscal 2003, 2002, or 2001 refer to the
Company's fiscal years ended March 31, 2003, 2002, and 2001,
respectively.
Principles of Consolidation
The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All
significant intercompany transactions have been eliminated
in consolidation.
Revenue Recognition
The Company generates revenue by selling pet medication
products primarily to retail consumers and minimally to
wholesale customers. The Company's policy is to recognize
revenue from product sales upon shipment, when the rights of
ownership and risk of loss have passed to the consumer.
Deferred membership revenue consists of cash collected on
the sale of one and three-year memberships. Membership fees
are amortized to income ratably over the membership period.
During fiscal year 2001 the Company discontinued the PetMed
Express, Inc. membership plan. Outbound shipping and
handling fees are included in sales and are billed upon
shipment. Shipping and handling expenses are included in
cost of sales.
The majority of the Company's sales are paid by credit cards
and the Company usually receives the cash settlement in one
to three banking days. Credit card sales minimize our
accounts receivable balances relative to our sales. The
Company maintains an allowance for doubtful accounts for
losses that the Company estimates will arise from the
customers' inability to make required payments, arising from
either credit card charge-backs or insufficient fund checks.
The Company determines its estimates of the uncollectibility
of accounts receivable by analyzing historical bad debts and
current economic trends. At March 31, 2003 and 2002 the
allowance for doubtful accounts was approximately $17,000
and $7,000, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with
maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents at March 31, 2003
and 2002, consist of the Company's cash accounts, overnight
repurchase agreements, and short-term investments with a
maturity of three months or less. The carrying amount of
cash equivalents approximates fair value.
The Company maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts.
Use of Estimates
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles in
the United States of America requires management to make
estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
F-7
(1) Summary of Significant Accounting Policies (Continued)
Inventories
Inventories consist of prescription and non-prescription pet
medications that are available for sale and are priced at
the lower of cost or market value using a weighted average
cost method. The Company writes down its inventory for
estimated obsolescence. At March 31, 2003 and 2002 the
inventory reserve was approximately $87,000 and $75,000,
respectively.
Property and Equipment
Property and equipment are stated at cost and depreciated
using the straight-line method over the estimated useful
lives of the assets. The furniture, fixtures, equipment and
computer software are depreciated over periods ranging from
three to seven years. Leasehold improvements and assets
under capital lease agreements are amortized over the
shorter of the underlying lease agreement or the useful life
of the asset.
Long-lived Assets
Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the
carrying amount may not be recoverable. Recoverability of
assets is measured by a comparison of the carrying amount of
the asset to net future cash flows expected to be generated
from the asset.
Intangible Asset
The intangible asset consists of a toll free telephone
number, which the Company obtained in the quarter ended
September 30, 2002. The Company paid $365,000, to reimburse
previously expended advertising costs relating to obtaining
the rights to the toll free number. In accordance with the
Statement of Financial Accounting Standards ("SFAS") No.
142, Goodwill and Other Intangible Assets, the intangible
asset is not being amortized, and is subject to an annual
review for impairment.
Advertising
The Company's advertising expense consists primarily of
television advertising, internet marketing, catalog and
postcard production, and mailing costs. Television costs
are expensed as the ads are televised and catalog and
postcard costs are expensed when the related catalog and
postcards are produced, distributed or superseded.
Accounting for Stock-Based Compensation
The Company accounts for employee stock options using the
intrinsic value method as prescribed by Accounting
Principles Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees. The Company follows the
disclosure provisions of SFAS No. 123, Accounting for Stock-
Based Compensation, for employee stock options. Had the
Company determined employee compensation cost based on the
fair value at the grant date for its stock options under
SFAS No. 123, the Company's net income would have been
decreased to the pro forma amounts indicated below:
Year Ended March 31, 2003 2002 2001
-------------------- ------------ ------------ ------------
Reported net income (loss): $ 3,257,565 $ 825,413 $ (2,826,707)
Deduct: total stock-based employee
compensation expense determined
under fair-value based method
for all awards, net of related
tax effects 285,258 129,465 424,556
Proforma net income (loss): $ 2,972,307 $ 695,948 $ (3,251,263)
============ ============ ============
Reported basic net income (loss)
per share: $ 0.19 $ 0.05 $ (0.28)
============ ============ ============
Proforma basic net income (loss)
per share: $ 0.17 $ 0.04 $ (0.33)
============ ============ ============
Reported diluted net income (loss)
per share: $ 0.16 $ 0.04 $ (0.28)
============ ============ ============
Proforma diluted net income (loss)
per share: $ 0.14 $ 0.04 $ (0.33)
============ ============ ============
F-8
(1) Summary of Significant Accounting Policies (Continued)
The per share weighted-average fair value of stock options
granted during fiscal 2003, 2002, and 2001 was $1.28, $.70
and $.23, respectively, on the date of grant using the Black
Scholes option-pricing model, as prescribed by SFAS No. 123,
with the following weighted-average assumptions: no dividend
yield; risk-free interest rates ranging from 4 to 6 percent;
expected lives of 3-5 years, and expected volatility of 62
percent, 60 percent, and 91 percent, respectively.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash
equivalents, accounts receivable and accounts payable
approximate fair value due to the short-term nature of these
instruments. The carrying amount of the loan payable
approximates fair value as their interest rates approximate
current market rates.
Comprehensive Income
The Company has adopted SFAS No. 130, Reporting
Comprehensive Income, which requires that all items that are
recognized under accounting standards as components of
comprehensive income be reported in a financial statement
that is displayed with the same prominence as other
financial statements. The items of other comprehensive
income that are typically required to be displayed are
foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain
investments in debt and equity securities. There were no
items of other comprehensive income for any periods
presented herein.
Income Taxes
The Company accounts for income taxes under the provisions
of SFAS No. 109, Accounting for Income Taxes, which
generally requires recognition of deferred tax assets and
liabilities for the expected future tax benefits or
consequences of events that have been included in the
consolidated financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined
based on differences between the financial reporting
carrying values and the tax bases of assets and liabilities,
and are measured by applying enacted tax rates and laws for
the taxable years in which those differences are expected to
reverse.
Recent Accounting Pronouncements
The Company does not believe that any recently issued, but
not yet effective, accounting standard, if currently
adopted, will have a material effect on the Company's
consolidated financial position, results of operations or
cash flows.
(2) Property and Equipment
Major classifications of property and equipment consist of
the following:
March 31,
2003 2002
--------- ---------
Leasehold improvements 289,901 42,891
Computer software 327,197 302,537
Furniture, fixtures and equipment 1,606,484 1,325,635
Equipment and software under
capital lease 113,398 280,849
--------- ---------
2,336,980 1,951,912
Less: accumulated depreciation
and amortization (840,001) (831,856)
--------- ---------
Property and equipment, net $ 1,496,979 1,120,056
========= =========
Amortization expense for equipment and software under
capital leases was $24,123, $93,169, and $114,881 for fiscal
2003, 2002, and 2001, respectively.
F-9
(3) Accounts Payable and Accrued Expenses
Major classifications of accounts payable and accrued
expenses consist of the following:
March 31,
2003 2002
--------- ---------
Accounts payable 2,570,459 1,873,925
Accrued salaries 237,165 180,315
Other accrued liabilities 488,599 670,755
--------- ---------
Accounts payable and
accrued expenses $ 3,296,223 2,724,995
========= =========
(4) Mortgage Payable, Line of Credit Agreement and Loan
Obligation
On May 31, 2001, the Company sold their 50,000 square foot
office building, which houses the Company's principal
executive offices and warehouse, to an unrelated third
party. The Company received gross proceeds of $2,150,000,
of which approximately $1,561,000 was used to pay off the
mortgage, and the Company recognized a loss on the sale of
approximately $185,000. The Company then entered into a
five-year term lease agreement for 20,000 of the 50,000
square foot Pompano Beach office building. On February 22,
2002, the Company entered into a lease addendum which added
approximately 12,000 square feet, effective June 1, 2002, to
accommodate the Company's warehouse expansion.
On July 22, 2002, the Company executed an agreement which
increased the line of credit from $150,000 to $1,000,000.
On March 18, 2003, the Company increased the line of credit
agreement from $1,000,000 to $2,000,000, effective through
July 22, 2004. The interest rate is at the published thirty
day London Interbank Offered Rates ("LIBOR") plus 2.65%
(3.92% and 5.75% at March 31, 2003 and 2002, respectively),
and contains various financial and operating covenants. At
March 31, 2003 and 2002, there was $0 and $141,000,
respectively, outstanding under the line of credit
agreement.
On March 12, 2002, the Company entered into a $205,000,
three year term loan agreement with a bank, with interest
accruing at the lending institution's base rate plus 1%
(5.25% and 5.75% at March 31, 2003 and 2002, respectively).
The loan proceeds were used to purchase a $250,000 computer
server. The aggregate loan maturities are $68,000 per year
for three years.
The line of credit and the term loan are secured by
substantially all of the Company's assets.
(5) Shareholders' Equity
On November 22, 2000, Tricon Holdings, LLC, a Florida
limited liability corporation ("Tricon") a related party
(see Note 8), acquired 10,000,000 shares of the Company's
authorized and unissued shares of common stock and warrants
to purchase 3,000,000 shares of the Company's authorized and
unissued shares of common stock. The warrants are
exercisable at $.33 per share and expire on November 22,
2005. Tricon acquired the Company's shares and warrants in
exchange for $2,000,000, which was paid in fiscal year 2001.
On May 31, 2001, the Company's Board of Directors adopted an
amendment to the Corporation's Articles of Incorporation to
provide for the increase in the authorized amount of shares
of common stock from 20,000,000 to 40,000,000 and adopt an
amendment to the Company's 1998 Stock Option Plan (the
"Plan") to increase the number of shares of common stock
issuable under the Plan from 3,000,000 to 5,000,000 shares.
F-10
(5) Shareholders' Equity (Continued)
Preferred Stock
In April 1998, the Company issued 250,000 shares of its
$.001 par value preferred stock at a price of $4.00 per
share, less issuance costs of $112,187. Each share of the
preferred stock is convertible into approximately 4.05
shares of common stock at the election of the shareholder.
The preferred stock was recorded at $887,813, net of the
value of the beneficial conversion feature of $771,525. The
value of the beneficial conversion feature was computed as
the difference between the closing market price of the
Company's common stock ($1.75 per share) and the conversion
price of the preferred stock ($.988 per share) on the date
the preferred stock was sold. This amount was immediately
recognized as a reduction to net income available to common
stockholders. The shares have a liquidation value of $4.00
per share and may pay dividends at the sole discretion of
the Company. The Company does not anticipate paying
dividends to the preferred shareholders in the foreseeable
future. Each share of preferred stock is entitled to one
vote on all matters submitted to a vote of shareholders of
the Company. As of March 31, 2003 and 2002, 2,500 shares of
the convertible preferred stock remained unconverted and
outstanding.
(6) Income Taxes
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The tax effects of
temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are as
follows:
March 31,
2003 2002
--------- ---------
Deferred tax assets:
Bad debt and inventory reserves 39,041 30,946
Deferred compensation (stock options) 59,814 231,400
Intangible assets - 7,410
Accrued expenses 58,033 155,087
Net operating loss carryforward 1,439,932 1,856,732
--------- ---------
Deferred tax assets 1,596,820 2,281,575
Less: valuation allowance (938,766) (2,204,877)
--------- ---------
Total deferred tax assets 658,054 76,698
Deferred tax liabilities:
Depreciation (76,698) (76,698)
--------- ---------
Total net deferred taxes $ 581,356 -
========= =========
The change in the valuation allowance for the year ended
March 31, 2003 and 2002, is approximately $1,266,000 and
$349,204, respectively. At March 31, 2003, the Company had
net operating loss carryforwards of approximately
$3,800,000, of which $159,000 relate to the exercise of
stock options that will result in an adjustment to equity
when the benefit is realized. The net operating loss
carryforwards expire in the years 2013 through 2020. The
use of such net operating loss carryforwards is limited to
approximately $266,000 annually; due to the November 22,
2000 change of control.
F-11
(6) Income Taxes (Continued)
The reconciliation of income tax provision computed at the
U.S. federal statutory tax rates to income tax expense is as
follows:
Year Ended March 31,
2003 2002 2001
----------- ----------- -----------
Income taxes (tax benefit) at U.S.
statutory rates $ 1,183,338 $ 280,640 $ (961,080)
State income taxes (tax benefit),
net of federal tax benefit 126,339 29,962 (102,609)
Permanent differences 1,512 877 3,946
Other 177,763 - 33,647
Change in valuation allowance (1,266,111) - 1,026,096
Utilization of net operating losses - (311,479) -
----------- ------------ -----------
$ 222,841 $ - $ -
=========== ============ ===========
(7) Stock Options and Warrants
Stock Options Granted to Employees
The Company established the 1998 Stock Option Plan (the
"Plan") effective July 31, 1998, which provides for the
issuance of qualified options to officers, directors and key
employees, and nonqualified options to consultants and other
service providers. The Company has reserved 5,000,000
shares of common stock for issuance under the Plan. The
exercise prices of options issued under the Plan must be
equal to or greater than the market price of the Company's
common stock as of the date of issuance. The Company had
2,743,600 and 3,039,700 options outstanding under the Plan
at March 31, 2003 and 2002, respectively. Options issued
prior to July 31, 1998 are not included in the Plan.
A summary of the status of stock options and certain
warrants issued by the Company, together with changes during
the periods indicated, is presented in the following table:
Weighted-
average
Options exercise price
------------- --------------
Balance at March 31, 2000 3,705,500 $ 1.84
Options Granted 1,175,000 0.35
Options Canceled (335,800) 4.73
------------- --------------
Balance at March 31, 2001 4,544,700 $ 1.24
Options Granted 387,500 1.26
Options Canceled (695,100) 2.81
------------- --------------
Balance at March 31, 2002 4,237,100 0.98
Options Granted 910,432 0.75
Options and Warrants
Exercised (1,800,868) 0.36
Options Canceled (603,064) 1.45
------------- --------------
Balance at March 31, 2003 2,743,600 $ 1.06
============= ==============
F-12
(7) Stock Options and Warrants (Continued)
The following table summarizes information for options
currently outstanding and exercisable at March 31, 2003:
Options Outstanding Options Exercisable
------------------------------------ ---------------------
Weighted- Weighted- Weighted-
average average average
Exercise Remaining Exercise Exercise
Price Range Number Life Price Number Price
-------------- ------------------------------------ ---------------------
$ 0.20 - $0.86 862,500 4.35 years $0.44 539,164 $0.40
1.05 - 1.76 1,756,500 4.74 years 1.28 1,503,200 1.28
1.90 - 4.50 124,600 4.07 years 2.43 34,600 3.80
-------------- ------------------------------------ ---------------------
$ 0.20 - $4.50 2,743,600 4.58 years $1.06 2,076,964 $1.09
============== ==================================== =====================
At March 31, 2003 and March 31, 2002, the number of options
exercisable was 2,076,964 and 2,752,803, respectively, and
the weighted-average exercise price of those options was
$1.09 and $.96, respectively. Adjustments are made for
options forfeited prior to vesting.
Warrants
On November 22, 2000, Tricon Holdings, LLC, a Florida
limited liability corporation ("Tricon"), acquired
10,000,000 shares of the Company's authorized and unissued
shares of common stock and warrants to purchase 3,000,000
shares of the Company's authorized and unissued shares of
common stock. The warrants are exercisable at $.33 per
share and expire on November 22, 2005, and were assigned a
value of $601,260 using the Black Scholes option-pricing
model, as prescribed by SFAS No. 123, with the following
weighted-average assumptions: dividend yield 0.0 percent;
risk-free interest rates of 6.00 percent; expected lives of
3-5 years, and expected volatility of 91 percent. On
September 30, 2002, Tricon exercised 300,000 warrants at the
exercise price of $.33 per share, and the Company received
proceeds of $99,000.
(8) Related Party Transactions
Guven Kivilcim, a member of Tricon Holdings, LLC and a
member of the Company's board of directors, has an interest
in Intelligent Switching & Software LLC, and Numind Software
Systems, Inc., with which the Company conducted business
with during the fiscal years ended March 31, 2003 and 2002.
Intelligent Switching & Software LLC provided the Company
with long distance telecommunication services, and Numind
Software Systems, Inc. provided the Company with Internet
and website design and hosting services. The Company paid
$154,000 and $64,000 to Intelligent Switching & Software
LLC, and $45,000 and $0 to Numind Software Systems, Inc.,
for services during the fiscal years ended March 31, 2003
and 2002, respectively. The Company owed $5,000 and $64,000
to Intelligent Switching & Software LLC, and $14,000 and
$37,000 to Numind Software Systems, Inc., which were
included in the Company's accounts payable balance as of
March 31, 2003 and 2002, respectively.
F-13
(9) Net Income Per Share
In accordance with the provisions of SFAS No. 128, "Earnings
Per Share," basic net income per share is computed by
dividing net income available to common shareholders by the
weighted average number of common shares outstanding during
the period. Diluted net income per share includes the
dilutive effect of potential stock options exercises,
calculated using the treasury stock method. Outstanding
stock options, warrants, and convertible preferred shares
issued by the Company represent the only dilutive effect
reflected in diluted weighted average shares outstanding.
For the year ended March 31, 2001, potential common shares
have not been included in the computation of diluted
earnings per share, since the effect would be antidilutive.
The following is a reconciliation of the numerators and
denominators of the basic and diluted net income (loss) per
share computations for the periods presented:
Year Ended March 31,
2003 2002 2001
----------- ----------- -----------
Net income (loss) (numerator):
Net income (loss) $ 3,257,565 $ 825,413 $(2,826,707)
=========== =========== ===========
Shares (denominator)
Weighted average number of common
shares outstanding used in basic
computation 17,300,130 16,360,010 9,943,625
Common shares issuable upon exercise
of stock options and warrants 3,439,260 3,369,358 -
Common shares issuable upon conversion
of preferred shares 10,125 10,125 -
----------- ----------- -----------
Shares used in diluted computation 20,749,515 19,739,493 9,943,625
=========== =========== ===========
Net income per common share:
Basic $ 0.19 $ 0.05 $ (0.28)
=========== =========== ===========
Diluted $ 0.16 $ 0.04 $ (0.28)
=========== =========== ===========
At March 31, 2003 and 2002, 124,600 and 2,124,600 shares,
respectively, of common stock options and warrants, with a
weighted average exercise price of $2.43 and $1.53,
respectively, were excluded from the diluted net income per
share computation as their exercise prices were greater than
the average market price of the common shares for the
period.
(10) Valuation and Qualifying Accounts
Activity in the Company's valuation and qualifying accounts
consists of the following:
Year Ended March 31,
2003 2002 2001
----------- ----------- -----------
Allowance for doubtful accounts:
Balance at beginning of period $ 7,475 $ 9,740 $ 28,747
Provision for doubtful accounts 14,759 (319) (19,007)
Write-off of uncollectible accounts
receivable (5,590) (1,946) -
----------- ----------- -----------
Balance at end of period $ 16,644 $ 7,475 $ 9,740
=========== =========== ===========
Valuation allowance for deferred tax
assets:
Balance at beginning of period $ 2,204,877 $ 2,554,081 $ 1,527,985
(Deletions) / additions (1,266,111) (349,204) 1,026,096
----------- ----------- -----------
Balance at end of period $ 938,766 $ 2,204,877 $ 2,554,081
=========== =========== ===========
F-14
(11) Commitments and Contingencies
Legal Matters
Various complaints had been filed with the Florida Board of
Pharmacy. These complaints, the majority of which were
filed by veterinarians who are in competition with the
Company for the sale of pet prescription-required products,
alleged violations of the Pharmacy Practice Act and
regulations promulgated thereunder. The vast majority of
the complaints alleged that the Company, through its
pharmacists, improperly dispensed prescription-required
veterinary medication based on prescriptions verified
through the Company's discontinued alternate veterinarian
program. The alternate veterinarian program used a
veterinarian outside the state of Florida to verify
prescriptions for certain pets outside the state of Florida.
While the program was not used for pets residing in the
state of Florida, the complaints had, for the most part,
been filed with the Florida Board of Pharmacy. Other
complaints alleged the dispensing of medication without a
valid prescription, the sale of non-conforming products and
that the Company's pharmacy was operating at the same
location as another pharmacy, with which it had a
contractual relationship. The Company contested all
allegations and continued discussions in an attempt to reach
a resolution of these matters.
In February 2002, the Company voluntarily ceased the use of
its alternate veterinarian program, and in March 2002 a
business decision was made to enter into a settlement
agreement with the Florida Board of Pharmacy, rather than to
proceed with costly and lengthy litigation. In April 2002,
the Florida Board of Pharmacy approved the settlement
agreement. The Florida Board of Pharmacy did not reach any
finding of fact or conclusion of law that the Company
committed any wrongdoing or violated any rules or laws
governing the practice of pharmacy. According to the
settlement agreement, the Company's pharmacy license was
placed on probation for a period of three years and the
Company, the Company's pharmacists and contracted pharmacy
and pharmacist, paid approximately $120,000 in fines and
investigative costs, in July 2002. The Company remains
licensed with the State of Florida and continues to operate
its principal business in Florida.
Additional complaints have been filed with other states'
Pharmacy Boards. These complaints, the majority of which
were filed by veterinarians who are in competition with the
Company for the sale of pet prescription-required products,
allege violations of the Pharmacy Practice Act and
regulations promulgated thereunder. The vast majority of
the complaints allege that the Company, through its
pharmacists, improperly dispensed prescription-required
veterinary medication based on prescriptions verified
through the Company's alternate veterinarian program. The
Company contested all allegations and continued discussions
in an attempt to reach a resolution of these matters.
In fiscal 2003, the Company reached settlement agreements
with the Louisiana, Missouri, New Mexico, and Ohio State
Pharmacy Boards. According to the settlement agreements,
the Company was required to terminate the alternate
veterinarian program in the state and the Company's permit
was placed on probation. As of March 31, 2003, the Company
had paid all fines in full to cover any or all
administrative and investigative costs associated with these
settlements. At March 31, 2003, there was no accrual
relating to these settlements. There can be no assurances
made that other states will not attempt to take similar
actions against the Company in the future.
In February 2000, the United States Environmental Protection
Agency ("EPA") issued a Stop Sale, Use or Removal Order to
the Company regarding the alleged distribution or sale of
misbranded Advantage products in violation of the Federal
Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as
amended. The order provides that the company shall not
distribute, sell, use or remove the products listed in the
order, which are allegedly misbranded. The order further
provides that the Company shall not commence any sale or
distribution of those products without the prior written
approval from the EPA. The Stop Sale, Use or Removal Order
does not assert any claim for monetary damages; rather, it
is in the nature of a cease and desist order. The Company
denied any alleged violations. On February 16, 2000, the
Company submitted a written response to the order. The EPA
assessed a fine in the amount of $445,000. In fiscal 2001
the Company accrued $445,000 of legal settlement expense.
In September 2001, the Company and the EPA entered into a
Consent Agreement and Final Order ("CAFO"). The settlement
agreement required the Company to pay a civil penalty of
$100,000 plus interest, requiring a payment of $56,000,
which was paid in September 2002, and $53,000 due on
September 30, 2003, a reduction from the previously assessed
fine of $445,000. For the purpose of this CAFO, the Company
admitted to the jurisdictional allegations set forth, and
neither admitted nor denied the alleged violations. On
September 28, 2001, the CAFO was approved and ordered by the
regional judicial officer. Accordingly, a gain of $345,000
was reflected in the statement of income for the year ended
March 31, 2002, to reflect the adjustment to this
settlement.
F-15
(11) Commitments and Contingencies (Continued)
On March 19, 2002, Novartis Animal Health U.S., Inc.
("Novartis") filed a complaint against the Company and two
other defendants in U.S. District Court for the Southern
District of Florida. Novartis purports to assert seven
claims related to the Company's alleged sale of pet
medications produced for a Novartis Australian sister
company: Count I: Infringement of Registered Trademark Under
Section 32 of the Lanham Act, 15 U.S.C. 1114; Count II:
Infringement of Unregistered Trademarks Under Section 43(a)
of the Lanham Act, 15 U.S.C. 1125(a); Count III: False
Advertising Under Section 43(a) of the Lanham act, 15 U.S.C.
1125(a); Count IV: Misleading Advertising Under Florida
Statutory Law; Count V: Deceptive and Unfair Trade Practices
Under Florida Statutory Law; Count VI: Injury to Business
Reputation Under Florida Statutory Law; Count VII: Common
Law Unfair Competition. Subsequent to the year ended March
31, 2003, the Company reached a final settlement agreement
with Novartis. According to the confidential settlement
agreement dated April 7, 2003, the Company has
satisfactorily resolved the contested issues raised by the
complaint and the confidential settlement terms will not
have a material impact on the Company's operations and
financial results.
The Company is a defendant in a lawsuit in Texas state
district court seeking injunctive and monetary relief styled
Texas State Board of Pharmacy and State Board of Veterinary
Medical Examiners v. PetMed Express, Inc. Cause No.GN-
202514, in the 201st Judicial District Court, Travis County,
Texas. The Company in its initial pleading denied the
allegations contained therein. The Company will vigorously
defend, is confident of its compliance with the applicable
law, and finds wrong-on-the-facts the vast majority of the
allegations contained in the Plaintiffs' supporting
documentation attached to the lawsuit. Discovery has
recently commenced. At this early stage of the litigation
it is difficult to assess any possible outcome or estimate
any potential loss in the event of an adverse outcome.
On May 1, 2001, the former Chief Financial Officer ("CFO")
of the Company, provided notice of termination of his
Executive Employment Agreement with the Company dated March
7, 2000, as amended. In the notice, the former CFO also
demanded payment of certain benefits allegedly due under the
Executive Employment Agreement. The Company continued
discussions in an effort to resolve this matter, and in
accordance with the CFO's Executive Employment Agreement,
the Company accrued a severance charge for the amount of
$120,000 in fiscal 2002. On October 31, 2001, the Company
entered into a Release and Termination agreement with its
former CFO. The former CFO's termination date was effective
as of May 31, 2001. The agreement entitles the former CFO
to receive an amount of $120,000, which was paid in fiscal
2002. The former CFO had a right to exercise any stock
options granted to him by the Company (the "vested
options"), for a period of 30 days from the termination
date. Additionally, the former CFO agreed to provide
consulting services to the Company on financial matters
until March 31, 2002, for which he was separately
compensated.
On June 13, 2001, the Company entered into a Release and
Termination agreement with its former Chief Operating
Officer ("COO"). The former COO's termination date was
effective as of May 18, 2001. The agreement entitles the
former COO to receive an amount of $75,000, which was paid
in fiscal 2002. The former COO had a right to exercise any
stock options granted to him by the Company (the "vested
options"), for a period of 30 days from the termination
date. Additionally, the former COO agreed to provide
consulting services to the Company on regulatory and legal
matters until December 31, 2001, for which he was separately
compensated.
Routine Proceedings
The Company is a party to routine litigation incidental to
its business. The Company's management does not believe
that the resolution of any or all of such routine litigation
is likely to have a material adverse effect on the Company's
financial condition or results of operations.
Employment Agreement
On March 16, 2001, the Company entered into an employment
agreement with its Chief Executive Officer ("CEO"). Under
the terms of this three-year agreement the Company will pay
the CEO an annual salary of $150,000 for the first six
months of the agreement, and thereafter his annual salary
will be increased to $200,000. The Company also granted the
CEO options to purchase 750,000 shares of its common stock
under the Company's 1998 Stock Option Plan at an exercise
price of $.32 per share, which vest at the rate of 187,500
options on each of March 16, 2001, 2002, 2003 and 2004.
F-16
(11) Commitments and Contingencies (Continued)
Operating Lease
The Company leases their 32,000 square foot principal
executive offices and warehouse, which expires in fiscal
2007. The Company is responsible for certain maintenance
costs, taxes and insurance under this lease. The future
minimum annual lease payments as of March 31, 2003, are as
follows:
Years Ending March 31,
----------------------
2004 $ 277,000
2005 288,000
2006 300,000
2007 50,000
-----------
Total lease payments $ 915,000
===========
Rent expense was $253,000 and $149,000 for the year ended
March 31, 2003 and 2002, respectively.
(12) Subsequent Events
Subsequent to fiscal 2003, the Company received net proceeds
of $766,000 upon the exercise and issuance of 644,166 shares
of common stock, of which 600,000 shares were exercised by
the Company's president.
(13) Quarterly Financial Data (unaudited)
Summarized unaudited quarterly financial data for fiscal
2003 and 2002 is as follows:
Quarter Ended: June 30, 2002 September 30, 2002 December 31, 2002 March 31, 2003 (a)
-------------- ------------- ------------------ ----------------- --------------
Sales $ 14,830,755 $ 14,229,702 $ 11,050,124 $ 14,864,335
Income from operations $ 1,291,235 $ 307,754 $ 693,269 $ 1,190,749
Net income $ 902,329 $ 204,887 $ 434,710 $ 1,715,639
Diluted net income per share $ 0.04 $ 0.01 $ 0.02 $ 0.09
Quarter Ended: June 30, 2001 September 30, 2001 December 31, 2001 March 31, 2002
-------------- ------------- ------------------ ----------------- --------------
Sales $ 5,363,650 $ 7,762,825 $ 8,248,904 $ 10,650,552
(Loss) income from operations $ (880,765) $ 56,246 $ 368,433 $ 1,204,026
Net (loss) income $ (1,090,684) $ 393,378 $ 353,348 $ 1,169,371
Diluted net (loss) income
per share $ (0.07) $ 0.02 $ 0.02 $ 0.07
(a) The Company recorded a deferred tax asset of approximately
$581,000, during the quarter ended March 31, 2003,
resulting in an increase of diluted net income of $.03 per
share.
F-17
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2003 2003
----------- ------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,492,504 $ 984,169
Accounts receivable, less allowance
for doubtful accounts of $26,071 and
$16,644, respectively 1,297,609 651,883
Inventories 6,885,161 4,268,146
Prepaid expenses and other current assets 458,395 478,108
----------- ------------
Total current assets 10,133,669 6,382,306
Property and equipment, net 1,579,530 1,496,979
Deferred income taxes 581,356 581,356
Intangible asset 365,000 365,000
Other assets 171,822 200,155
----------- ------------
Total assets $12,831,377 $ 9,025,796
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 3,503,423 $ 2,570,459
Accrued expenses and other current liabilities 997,105 725,764
Current portion of loan obligation 68,442 68,442
----------- ------------
Total current liabilities 4,568,970 3,364,665
Loan obligation, less current portion 51,332 68,443
----------- ------------
Total liabilities 4,620,302 3,433,108
----------- ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized; 2,500 convertible shares
issued and outstanding with a liquidation
preference of $4 per share 8,898 8,898
Common stock, $.001 par value, 40,000,000
shares authorized; 19,140,877 and 18,460,878
shares issued and outstanding, respectively 19,141 18,461
Additional paid-in capital 8,464,330 7,279,207
Accumulated deficit (281,294) (1,713,878)
----------- ------------
Total shareholders' equity 8,211,075 5,592,688
----------- ------------
Total liabilities and shareholders' equity $12,831,377 $ 9,025,796
=========== ============
See accompanying notes to condensed consolidated financial statements.
F-18
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended June 30,
2003 2002
------------ -------------
Sales $ 30,387,563 $ 14,830,755
Cost of sales 18,582,680 8,568,253
------------ -------------
Gross profit 11,804,883 6,262,502
------------ -------------
Operating expenses:
General and administrative 3,021,254 2,083,423
Advertising 6,508,990 2,807,180
Depreciation and amortization 127,351 80,664
------------ -------------
Total operating expenses 9,657,595 4,971,267
------------ -------------
Income from operations 2,147,288 1,291,235
------------ -------------
Other income (expense):
Interest expense (2,681) (5,590)
Interest income 2,149 4,133
Other, net 608 2,335
------------ -------------
Total other income (expense) 76 878
------------ -------------
Income before provision for income taxes 2,147,364 1,292,113
Provision for income taxes 714,780 389,784
------------ -------------
Net income $ 1,432,584 $ 902,329
============ =============
Net income per common share:
Basic $ 0.08 $ 0.05
============ =============
Diluted $ 0.06 $ 0.04
============ =============
Weighted average number of common
shares outstanding:
Basic 19,010,438 16,590,779
============ =============
Diluted 23,012,611 20,092,544
============ =============
See accompanying notes to condensed consolidated financial statements.
F-19
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended June 30,
2003 2002
------------ -------------
Cash flows from operating activities:
Net income $ 1,432,584 $ 902,329
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 127,351 80,664
Tax benefit related to stock options
exercised 387,600 -
Bad debt expense 9,588 1,728
(Increase) decrease in operating assets
and liabilities:
Accounts receivable (655,314) (50,850)
Inventory (2,617,015) (1,992,435)
Prepaid expenses and other current
assets 19,713 (10,441)
Other assets 28,333 -
Accounts payable 932,964 448,248
Accrued expenses and other current
liabilities 271,341 283,047
------------ -------------
Net cash used in operating activities (62,855) (337,710)
------------ -------------
Cash flows from investing activities:
Purchases of property and equipment (209,902) (312,461)
------------ -------------
Net cash used in investing activities (209,902) (312,461)
------------ -------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 798,203 159,000
Payments on loan obligation (17,111) (17,110)
------------ -------------
Net cash provided by financing activities 781,092 141,890
------------ -------------
Net increase (decrease) in cash and cash
equivalents 508,335 (508,281)
Cash and cash equivalents, at beginning
of period 984,169 737,284
------------ -------------
Cash and cash equivalents, at end of period $ 1,492,504 $ 229,003
============ =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,404 $ 5,634
============ =============
Cash paid for income taxes $ 32,500 $ -
============ =============
See accompanying notes to condensed consolidated financial statements.
F-20
PETMED EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Summary of Significant Accounting Policies
Organization
PetMed Express, Inc. and subsidiaries is a leading nationwide
pet pharmacy. The Company markets prescription and non-
prescription pet medications along with health and nutritional
supplements for cats and dogs direct to the consumer. The
Company offers consumers an attractive alternative for obtaining
pet medications in terms of convenience, price, and speed of
delivery.
The Company markets its products through national television,
on-line and direct mail advertising campaigns, which aim to
increase the recognition of the "1-800-PetMeds" brand name,
increase traffic on its web site at www.1800PetMeds.com , acquire
new customers, and maximize repeat purchases. The Company's
executive offices are located in Pompano Beach, Florida.
The Company's fiscal year end is March 31, and references
herein to fiscal 2004 or 2003 refer to the Company's fiscal years
ending March 31, 2004 and 2003, respectively.
Basis of Presentation and Consolidation
The Company is no longer eligible as a small business filer,
as of April 1, 2003 the Company holds the status of a regular
Securities Exchange Act filer. The accompanying unaudited
condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do
not include all of the information and footnotes required by
accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of
management, the accompanying condensed consolidated financial
statements contain all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial
position of the Company, after elimination of intercompany
accounts and transactions, at June 30, 2003 and the statements of
income for the three months ended June 30, 2003 and 2002 and cash
flows for the three months ended June 30, 2003 and 2002. The
results of operations for the three months ended June 30, 2003,
are not necessarily indicative of the operating results expected
for the fiscal year ending March 31, 2004. These financial
statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's annual
report on Form 10-KSB for the fiscal year ended March 31, 2003.
The condensed consolidated financial statements include the
accounts of PetMed Express, Inc. and its wholly owned
subsidiaries. All significant intercompany transaction has been
eliminated upon consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements
in conformity with generally accepted accounting principles in
the United States of America requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the condensed consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Note 2: Net Income Per Share
In accordance with the provisions of SFAS No. 128, "Earnings
Per Share," basic net income per share is computed by dividing
net income available to common shareholders by the weighted
average number of common shares outstanding during the period.
Diluted net income per share includes the dilutive effect of
potential stock options exercises, calculated using the treasury
stock method. Outstanding stock options, warrants, and
convertible preferred shares issued by the Company represent the
only dilutive effect reflected in diluted weighted average shares
outstanding.
F-21
The following is a reconciliation of the numerators and
denominators of the basic and diluted net income per share
computations for the periods presented:
Three Months Ended June 30,
2003 2002
------------ ------------
Net income (numerator):
Net income $ 1,432,584 $ 902,329
Shares (denominator)
Weighted average number of common
shares outstanding used in basic
computation 19,010,438 16,590,779
Common shares issuable upon exercise
of stock options and warrants 3,992,048 3,491,640
Common shares issuable upon conversion
of preferred shares 10,125 10,125
------------ ------------
Shares used in diluted computation 23,012,611 20,092,544
============ ============
Net income per common share:
Basic $ 0.08 $ 0.05
============ ============
Diluted $ 0.06 $ 0.04
============ ============
For the periods ended June 30, 2003 and 2002, 24,600 and
1,224,600 shares of common stock options and warrants, with a
weighted average exercise price of $4.12 and $1.60, respectively,
were excluded from the diluted net income per share computation
as their exercise prices were greater than the average market
price of the common shares for the period.
Note 3: Accounting for Stock-Based Compensation
The Company accounts for employee stock options using the
intrinsic value method as prescribed by Accounting Principles
Board Opinion ("APB") No. 25, Accounting for Stock Issued to
Employees. The Company follows the disclosure provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, for employee
stock options. Had the Company determined employee compensation
cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income would have
been decreased to the pro forma amounts indicated below:
Three Months Ended June 30,
2003 2002
------------ ------------
Reported net income: $ 1,432,584 $ 902,329
Deduct: total stock-based employee
compensation expense determined
under fair-value based method for
all awards, net of related tax effects 44,859 91,290
------------ ------------
Proforma net income: $ 1,387,725 $ 811,039
============ ============
Reported basic net income per share: $ 0.08 $ 0.05
============ ============
Proforma basic net income per share: $ 0.07 $ 0.05
============ ============
Reported diluted net income per share: $ 0.06 $ 0.04
============ ============
Proforma diluted net income per share: $ 0.06 $ 0.04
============ ============
Note 4: Line of Credit
The Company maintains a $2,000,000 line of credit, effective
through July 22, 2004. The interest rate is at the published
thirty day London Interbank Offered Rates ("LIBOR") plus 2.65%
(3.75% at June 30, 2003), and contains various financial and
operating covenants. At June 30, 2003, there was no outstanding
balance under the line of credit agreement.
F-22
Note 5: Commitments and Contingencies
Various complaints had been filed with the Florida Board of
Pharmacy. These complaints, the majority of which were filed by
veterinarians who are in competition with the Company for the
sale of pet prescription-required products, alleged violations of
the Pharmacy Practice Act and regulations promulgated there
under. The vast majority of the complaints alleged that the
Company, through its pharmacists, improperly dispensed
prescription-required veterinary medication based on
prescriptions verified through the Company's discontinued
alternate veterinarian program. The alternate veterinarian
program used a veterinarian outside the state of Florida to
verify prescriptions for certain pets outside the state of
Florida. While the program was not used for pets residing in the
state of Florida, the complaints had, for the most part, been
filed with the Florida Board of Pharmacy. Other complaints
alleged the dispensing of medication without a valid
prescription, the sale of non-conforming products and that the
Company's pharmacy was operating at the same location as another
pharmacy, with which it had a contractual relationship. The
Company contested all allegations and continued discussions in an
attempt to reach a resolution of these matters.
In February 2002, the Company voluntarily ceased the use of its
alternate veterinarian program, and in March 2002 a business
decision was made to enter into a settlement agreement with the
Florida Board of Pharmacy, rather than to proceed with costly and
lengthy litigation. In April 2002, the Florida Board of Pharmacy
approved the settlement agreement. The Florida Board of Pharmacy
did not reach any finding of fact or conclusion of law that the
Company committed any wrongdoing or violated any rules or laws
governing the practice of pharmacy. According to the settlement
agreement, the Company's pharmacy license was placed on probation
for a period of three years and the Company, the Company's
pharmacists and contracted pharmacy and pharmacist, paid
approximately $120,000 in fines and investigative costs, in July
2002. The Company remains licensed with the State of Florida and
continues to operate its principal business in Florida.
Additional complaints have been filed with other states'
Pharmacy Boards. These complaints, the majority of which were
filed by veterinarians who are in competition with the Company
for the sale of pet prescription-required products, allege
violations of the Pharmacy Practice Act and regulations
promulgated there under. The vast majority of the complaints
allege that the Company, through its pharmacists, improperly
dispensed prescription-required veterinary medication based on
prescriptions verified through the Company's alternate
veterinarian program. The Company contested all allegations and
continued discussions in an attempt to reach a resolution of
these matters.
In fiscal 2003, the Company reached settlement agreements with
the Louisiana, Missouri, New Mexico, and Ohio State Pharmacy
Boards. According to the settlement agreements, the Company was
required to terminate the alternate veterinarian program in the
state and the Company's permit was placed on probation. As of
March 31, 2003, the Company had paid all fines in full to cover
any or all administrative and investigative costs associated with
these settlements. There can be no assurances made that other
states will not attempt to take similar actions against the
Company in the future.
In February 2000, the United States Environmental Protection
Agency ("EPA") issued a Stop Sale, Use or Removal Order to the
Company regarding the alleged distribution or sale of misbranded
Advantage products in violation of the Federal Insecticide,
Fungicide, and Rodenticide Act ("FIFRA"), as amended. The order
provides that the company shall not distribute, sell, use or
remove the products listed in the order, which are allegedly
misbranded. The order further provides that the Company shall
not commence any sale or distribution of those products without
the prior written approval from the EPA. The Stop Sale, Use or
Removal Order does not assert any claim for monetary damages;
rather, it is in the nature of a cease and desist order. The
Company denied any alleged violations. On February 16, 2000, the
Company submitted a written response to the order. The EPA
assessed a fine in the amount of $445,000. In fiscal 2001 the
Company accrued $445,000 of legal settlement expense.
In September 2001, the Company and the EPA entered into a
Consent Agreement and Final Order ("CAFO"). The settlement
agreement required the Company to pay a civil penalty of $100,000
plus interest, requiring a payment of $56,000, which was paid in
September 2002, and $53,000 due on September 30, 2003, a
reduction from the previously assessed fine of $445,000. For the
purpose of this CAFO, the Company admitted to the jurisdictional
allegations set forth, and neither admitted nor denied the
alleged violations. On September 28, 2001, the CAFO was approved
and ordered by the regional judicial officer. Accordingly, a
gain of $345,000 was reflected in the statement of income for the
year ended March 31, 2002, to reflect the adjustment to this
settlement.
F-23
On March 19, 2002, Novartis Animal Health U.S., Inc.
("Novartis") filed a complaint against the Company and two other
defendants in U.S. District Court for the Southern District of
Florida. Novartis purports to assert seven claims related to the
Company's alleged sale of pet medications produced for a Novartis
Australian sister company: Count I: Infringement of Registered
Trademark Under Section 32 of the Lanham Act, 15 U.S.C. 1114;
Count II: Infringement of Unregistered Trademarks Under Section
43(a) of the Lanham Act, 15 U.S.C. 1125(a); Count III: False
Advertising Under Section 43(a) of the Lanham act, 15 U.S.C.
1125(a); Count IV: Misleading Advertising Under Florida Statutory
Law; Count V: Deceptive and Unfair Trade Practices Under Florida
Statutory Law; Count VI: Injury to Business Reputation Under
Florida Statutory Law; Count VII: Common Law Unfair Competition.
Subsequent to the year ended March 31, 2003, the Company reached
a final settlement agreement with Novartis. According to the
confidential settlement agreement dated April 7, 2003, the
Company had satisfactorily resolved the contested issues raised
by the complaint and the confidential settlement terms had no
material impact on the Company's operations and financial
results.
The Company is a defendant in a lawsuit in Texas state
district court seeking injunctive and monetary relief styled
Texas State Board of Pharmacy and State Board of Veterinary
Medical Examiners v. PetMed Express, Inc. Cause No.GN-202514, in
the 201st Judicial District Court, Travis County, Texas. The
Company in its initial pleading denied the allegations contained
therein. The Company will vigorously defend, is confident of its
compliance with the applicable law, and finds wrong-on-the-facts
the vast majority of the allegations contained in the Plaintiffs'
supporting documentation attached to the lawsuit. Discovery has
recently commenced. At this early stage of the litigation it is
difficult to assess any possible outcome or estimate any
potential loss in the event of an adverse outcome.
Routine Proceedings
The Company is a party to routine litigation incidental to its
business. The Company's management does not believe that the
resolution of any or all of such routine litigation is likely to
have a material adverse effect on the Company's financial
condition or results of operations.
F-24
No dealer, sales representative or any other person has been
authorized to give any information or to make any
representations other than those contained in this
prospectus and, if given or made, such information or
representation must not be relied upon as having been
authorized by the company or any of the underwriters. This
prospectus does not constitute an offer of any securities
other than those to which it relates or an offer to sell, or
a solicitation of any offer to buy, to any person in any
jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this prospectus nor any
sale made hereunder shall, under any circumstances, create
an implication that the information set forth herein is
correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
Page
----
Prospectus Summary.........2
Risk Factors...............3
Forward-Looking
Statements...............10
Capitalization.............11
Use of Proceeds............11
Price Range of Common Stock
and Dividend Policy......12
Selected Financial
Data.....................13
Management's Discussion
and Analysis or Plan
of Operation.............14
Business...................28
Management.................37
Executive Compensation.....40
Certain Transactions.......43
Principal Shareholders.....44
Description of
Securities...............46
Selling Shareholders.......47
Plan of Distribution.......49
Legal Matters..............51
Experts....................51
Additional Information.....51
Financial Statements ......F-1
12,590,985 SHARES
PETMED EXPRESS, INC.
PROSPECTUS
----------
September 16, 2003