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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 000-28827
_____________________________________
PETMED EXPRESS, INC.
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(Exact name of Registrant in its charter)
FLORIDA 65-0680967
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1441 S.W. 29th Avenue, Pompano Beach, Florida 33069
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 979-5995
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Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
_____________________________________
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference
to the price at which the common equity was last sold, or
the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently
completed second fiscal quarter, was $61,167,000 (at
September 30, 2004).
The number of shares of the Registrant's common stock
outstanding as of June 3, 2005 was 23,487,058.
DOCUMENTS INCORPORATED BY REFERENCE
Information to be set forth in our Proxy Statement
relating to our 2005 Annual Meeting of Stockholders to be
held on August 5, 2005 is incorporated by reference in
Items 10, 11, 12, 13, and 14 of Part III of this report.
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PETMED EXPRESS, INC.
2005 Annual Report on Form 10-K
TABLE OF CONTENTS
Page
PART I.....................................................................1
Item 1. Business........................................................1
Item 2. Properties.....................................................10
Item 3. Legal Proceedings..............................................10
Item 4. Submission of Matters to a Vote of Security Holders............11
PART II...................................................................12
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities...........12
Item 6. Selected Financial Data........................................13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............14
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.................................................21
Item 8. Financial Statements and Supplementary Data....................22
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure......................40
Item 9A. Controls and Procedures........................................40
Item 9B. Other Information..............................................40
PART III..................................................................41
Item 10. Directors and Executive Officers of the Registrant.............41
Item 11. Executive Compensation.........................................41
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters..............41
Item 13. Certain Relationships and Related Transactions.................41
Item 14. Principal Accounting Fees and Services.........................41
PART IV...................................................................42
Item 15. Exhibits, Financial Statement Schedules........................42
SIGNATURES................................................................44
PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain information in this Annual Report on Form 10-K
includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. You can identify
these forward-looking statements by the words "believes,"
"intends," "expects," "may," "will," "should," "plan,"
"projects," "contemplates," "intends," "budgets,"
"predicts," "estimates," "anticipates," or similar
expressions. These statements are based on our beliefs, as
well as assumptions we have used based upon information
currently available to us. Because these statements
reflect our current views concerning future events, these
statements involve risks, uncertainties and assumptions.
Actual future results may differ significantly from the
results discussed in the forward-looking statements. A
reader, whether investing in our common stock or not,
should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Annual
Report.
When used in this Annual Report on Form 10-K, "PetMed
Express," "1-800-PetMeds," "PetMed," "PetMed Express.com,"
"the Company," "we," "our," and "us" refer to PetMed
Express, Inc. and our subsidiaries.
ITEM 1. BUSINESS
General
PetMed Express, Inc. and subsidiaries, d/b/a 1-800-
PetMeds, is a leading nationwide pet pharmacy. The Company
markets prescription and non-prescription pet medications,
and other health products for dogs, cats, and horses 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, online and direct mail/print advertising
campaigns, which aim to increase the recognition of the "1-
800-PetMeds" brand name, increase traffic on its website at
www.1800petmeds.com, acquire new customers, and maximize
repeat purchases. Our fiscal year end is March 31, our
executive offices are located at 1441 S.W. 29th Avenue,
Pompano Beach, Florida 33069, and our telephone number is
(954) 979-5995. The information contained on the Company's
website is not part of our Annual Report.
Our Products
We offer a broad selection of products for dogs, cats and
horses. 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 from the prices for medications charged by
veterinarians.
We research new products, and 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 website 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, cats and horses. Our current products include:
Non-Prescription Medications (OTC): Flea and tick control
products, bone and joint care products, vitamins and
nutritional supplements, and hygiene products.
Prescription Medications (Rx): Heartworm treatments,
thyroid and arthritis medications, antibiotics, and other
specialty medications, as well as generic substitutes.
1
Sales
The following table provides a breakdown of the
percentage of our total sales by each category during the
indicated periods:
Year Ended March 31,
2005 2004 2003
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Non-prescription medications 69% 69% 64%
Prescription medications 30% 30% 29%
Shipping and handling charges and other 1% 1% 7%
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Total 100% 100% 100%
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We offer our products through three main sales channels:
Internet, through our website, telephone contact center,
through our toll-free number, and direct mail/print, through
the 1-800-PetMeds catalog and postcards. We have designed
both our catalog and website 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.
Internet
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.
Our website offers health and nutritional product selections
for dogs, cats and horses, supported by relevant editorial
and easily obtainable or retrievable resource information.
From our home page, customers can search our website for
products and access resources on a variety of information on
dogs, cats and horses. Customers can shop at our website by
category, product line or individual product. We attracted
approximately 5.6 million visitors to our website over the
past 12 months (June 2004 to May 2005), approximately 14% of
those visitors placed an order, and our website generated
approximately 53% of our total sales for the same time
period.
Telephone Contact Center
We currently employ 92 customer care representatives in
our contact center. Our customer care 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 care representatives' time, providing quality
customer care and service and support. Our customer care
representatives receive a base salary and are rewarded with
commissions for sales.
Direct Mail/Print
The 1-800-PetMeds catalog is a full-color catalog that
features approximately 400 of our most popular 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 as part of direct mail
campaigns.
In March 2004 the Company introduced a free service on
its website, called, "ASK THE VET" which is located at
www.1800petmeds.com. Pet owners or anyone else can ask a
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question and a veterinarian or pharmacist will personally
answer it via email, most within 48 hours. Additionally,
all questions and answers are conveniently available for
viewing on the website, which lists over 30 categories on a
wide range of pet-related issues. Subjects include
allergies, fleas and ticks, heartworms and bone and joint
care.
Our Customers
Approximately 1,400,000 customers have purchased from us
within the last two years. We attracted approximately
510,000 and 572,000 new customers in fiscal 2005 and 2004,
respectively. Our customers are located throughout the
United States, with approximately 51% of customers residing
in California, Florida, Texas, New York, Pennsylvania, New
Jersey, and Georgia. The average retail purchase was
approximately $76.
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, 2005,
the majority of our sales were made to retail customers with
approximately 2% of our sales made to wholesale customers.
2
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 mail/print and e-mail, and online marketing.
Television Advertising
Our television advertising is designed to build brand
equity, create awareness, and generate initial purchases of
products via the telephone and the Internet. We have used
:30 and :15 second television commercials to attract new
customer orders, with the tagline "the 1-800-PetMeds
difference, great savings, fast service, free shipping."
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 Mail/Print and E-mail
We use direct mail/print and e-mail to acquire customers
and to remind our existing customers to reorder.
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 websites. 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 websites, as well as
with portals and search engines. We also make our brand
available to internet consumers by purchasing targeted
keywords and achieving prominent placement on the top search
engines and search engine networks, including Google,
Microsoft Network, and Yahoo.
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 to obtain the lowest cost. We purchase the
majority of our health and nutritional supplements directly
from manufacturers. (See Risk Factors.) Having strong
relationships with product manufacturers will ensure the
availability of adequate volume of products ordered by our
customers, and will 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. Part of our growth strategy includes
developing direct relationships with the leading
pharmaceutical manufacturers of the more popular
prescription and non-prescription medications.
Order Processing
The Company provides its customers with toll-free
telephone access to its customer care 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 from 1-800-PetMeds consists of a few
simple steps. A customer first places a call to our toll-
free telephone number or visits our website. 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 the verification for prescription
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 the Company's inventory and
shipped via United States Priority Mail, United Parcel
Service, or Federal Express. Our customers enjoy the
convenience of rapid home delivery, with approximately 72%
of all orders being shipped within 24 hours of ordering.
Our website allows customers to easily browse and purchase
substantially all of our products online. Our website is
designed to be fast, secure and easy to use with order and
shipping confirmations, and with online order tracking
capabilities.
3
Warehousing and Shipping
We inventory our products and fill all customer orders
from our 43,000 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 fulfilling and shipping
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 States
Postal Service, United Parcel Service, and Federal Express.
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 by the customer's veterinarian.
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 care representatives participate in ongoing
training programs under the supervision of our training
managers. These training sessions include a variety of
topics such as product knowledge, computer usage, customer
service tips and the relationship between PetMed Express and
veterinarians. Our customer care representatives respond to
customers' e-mails and calls that are related to order
status, prices and shipping. Our customer care
representatives also respond to customers through our live
web chat. If our customer care 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 care representatives are a valuable source of
feedback regarding customer satisfaction. Our customer
returns and credits average approximately 1.4% of total
sales.
Technology
PetMed Express utilizes integrated technologies in call
center, e-commerce, order entry, and inventory
control/fulfillment operations. Our systems are custom
configured by the Company to optimize our computer telephone
integration and mail order processing. The systems are
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 customer care
representatives are on the phone with the customers. Our
information systems provide our customer care
representatives 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 market is competitive and highly
fragmented. Our competitors consist of veterinarians,
traditional retailers, and other mail-order and online
retailers of pet medications and other health products. The
Company believes that the following are the 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 website content.
We compete with veterinarians in the sale of prescription
and non-prescription pet medications and other health
products. Many pet owners may prefer the convenience of
purchasing their pet medications or other health products 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 PetMed
Express.
According to the American Pet Products Manufacturers
Association, pet spending in the United States increased
5.9% to $34.4 billion in 2004. Pet supplies and medications
represented $8.1 billion, or 24% of the total pet spending
in the United States. The pet medication market size is
estimated to be approximately $3 billion, with veterinarians
having the majority of the market share. The dog and cat
population is approximately 153 million, with approximately
62% of all households owning a pet.
4
The Company believes that the following are the main
competitive strengths which differentiate 1-800-PetMeds from
the competition:
- "1-800-PetMeds" brand name;
- Quality customer service, care and support;
- Experienced management team;
- Consumer benefit structure of savings and convenience;
- Licensed pharmacy to conduct business in 49 states;
- Operating / technology infrastructure in place; and
- Multiple sources of supply for pet medications.
Intellectual Property
We conduct our business under the trade name "1-800-
PetMeds." We believe this name, which is also our toll-free
telephone 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,
- ------------------- ------------------- ---------------------
and www.petmeds.com. As with phone numbers, we do not
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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 are the exclusive owners of United States
Trademark Registrations for "PetMed Express [R],"
"1888PetMeds[R]" and "1-800-PetMeds[R]" and have a trademark
application pending for "PetMeds."
Government Regulation
Dispensing prescription medications 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 are licensed by the Florida Board of Pharmacy.
Our license is valid until February 28, 2007. We are also
licensed and/or regulated by 48 other state pharmacy boards
and other regulatory authorities including, but not
necessarily limited to, the United States 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 thereunder. 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 pharmacy
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
Item 3. Legal Proceedings.
Employees
The Company currently has 140 full time employees, and 40
temporary employees, including: 101 in sales, customer care
and marketing; 23 in fulfillment and purchasing; 45 in our
pharmacy; 3 in information technology; 3 in administrative
positions; and 5 in management. None of the Company's
employees are represented by a labor union, or governed by
any collective bargaining agreements. The Company reserves
the right to hire the temporary employees after a period of
3 months. The Company considers relations with its
employees as satisfactory.
Risk Factors
You should carefully consider the risks and uncertainties
described below, and all the other information included in
this Annual Report before you decide to invest in our common
stock. Any of the following risks could materially
adversely affect our business, financial condition or
operating results and could result in a loss of your
investment.
There can be no assurances that we can sustain profitable
operations in future periods.
We reported net income of $8,010,000, $5,814,000, and
$3,258,000 for the years ended March 31, 2005, 2004, and
2003, respectively. Our profitability during fiscal 2005
was due in part to increases in our reorder revenues and the
leveraging of our general and administrative and advertising
expenses. There are no assurances we will continue to
generate revenues at this increased level, or that we will
remain profitable during fiscal 2006 and beyond. If our
operations were to cease being profitable, our liquidity in
future periods would be adversely affected.
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.
5
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, the
Company is 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. 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.
While we make every effort to fully comply with the
applicable state rules, laws and regulations, from time to
time we have been the subject of administrative complaints
regarding the authorization of prescriptions prior to
shipment. 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 fines, or that one or
more of our pharmacy licenses may not be suspended or
revoked. See Item 3. Legal Proceedings.
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 pharmacy boards, which could reduce or
eliminate our ability to verify certain prescriptions
outside the State of Florida.
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
have resided in a different state than 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. See Item 3.
Legal Proceedings. Many of the complaints related to
prescriptions verified through our alternate veterinarian
program. The alternate veterinarian program used a
veterinarian outside the State of Florida to verify certain
prescriptions for 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 the
Company 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.
We currently purchase a portion of our prescription and non-
prescription medications from third party distributors and
we are not an authorized distributor of these products. We
do not have any guaranteed supply of these medications at
any pre-established prices.
For the fiscal years ended March 31, 2005 and 2004, the
majority 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 are
not successful in achieving this goal, we will continue to
rely upon secondary sources.
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 are 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 could materially adversely affect our
financial condition and 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.
Our current product line contains approximately 650 SKUs.
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.
6
Resistance from veterinarians to authorize prescriptions
could cause our sales to decrease and could materially
adversely affect our financial condition and results of
operations.
Since we began our operations 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 30% of our sales for
the fiscal year. 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 and our financial condition and results of
operations may be materially adversely affected.
Our success depends in part on the willingness of consumers
to purchase pet medications from us. If we do not succeed in
changing consumer-purchasing patterns, our financial
condition and results of operations may be materially
adversely affected.
The direct marketing of prescription and non-prescription
pet medications and health and nutritional supplements is
relatively new. Our success will depend upon our ability to
engage consumers who have historically purchased pet
medications and health and nutritional supplements from
veterinarians. We may not be able to convert a large number
of these pet owners to our customers. In order for us to be
successful, many of these consumers must be willing to
utilize new ways of buying these products. We cannot
guarantee that we will be successful in shifting these
consumer purchasing patterns away from veterinarians to us.
If we do not attract consumers to purchase these products
from us, our financial condition and results of operations
may be materially adversely affected.
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.
During fiscal 2002, a business decision was made to
discontinue purchasing any product from international
distributors. We had purchased a portion of our
prescription and non-prescription medications from
international distributors in the past. These medications
may have been 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. See Item 3.
Legal Proceedings.
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.
While we ship pet medications to customers in all 50
states, approximately 51% of our sales for the fiscal year
ended March 31, 2005 were made to customers located in the
states of California, Florida, Texas, New York,
Pennsylvania, New Jersey, and Georgia. 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.
We compete directly and indirectly with veterinarians for
the sale of pet medications and other health products.
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. Online retailers may have a
competitive advantage over us because of established
affiliate relationships to drive traffic to their website.
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 catalog or
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.
We also face a significant challenge from our competitors
forming alliances with each other, such as those between
online and brick and mortar retailers. These relationships
may enable both their retail and online stores to negotiate
better
7
pricing and better terms from suppliers by
aggregating the demand for products and negotiating volume
discounts which could be a competitive disadvantage to us.
The content of our website could expose us to various kinds
of liability, which, if prosecuted successfully, could
negatively impact our business.
Because we post product information and other content on
our website, 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 or unauthorized use of other parties' proprietary
technology. 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.
We rely on a combination of trademark, trade secret,
copyright laws and contractual restrictions to protect our
intellectual property rights. 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 website, 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 could
seriously harm our business and operating results.
Third parties may also claim infringement by us with
respect to past, current or future technologies. 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 names or to
prevent others from using names that are confusingly
similar, our business may be adversely impacted.
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.
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.
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
power and equipment failures relating to our call center or
websites; or interruptions or disruptions to major
transportation infrastructure or other events that do not
occur on our premises.
8
A portion of our sales are seasonal and our operating
results are difficult to predict and may fluctuate.
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 are affected
by the seasons, due to the seasonality of mainly heartworm
and flea and tick medications. Seasonality trends are
divided into percentage of sales by quarter. For the
quarters ended June 30, 2004, September 30, 2004, December
31, 2004, and March 31, 2005 Company sales were 33%, 26%,
19%, and 22%, 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 ability to obtain new customers at a reasonable cost,
retain existing customers, or encourage reorders;
- Our ability to increase the number of visitors to our
website, or our ability to convert visitors to our website into
customers;
- The mix of medications and other pet products sold by us;
- Our ability to manage inventory levels;
- Our ability to adequately maintain, upgrade and develop our
website, the systems that we use to process customers' 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 materially
adversely affect our financial condition and results of
operations in future periods.
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 a loss on your investment.
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
market price and volume fluctuations of publicly-traded
companies; and general political, economic and market
conditions.
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 interest of our controlling stockholder could conflict
with those of our other stockholders.
Tricon Holdings, LLC, ("Tricon") our principal
stockholder, owns and controls 23.3% of our voting
securities. This stockholder is able to influence the
outcome of stockholder 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 stockholders believe
it is in their best interest.
We may issue additional shares of preferred stock that could
defer a change of control or dilute the interests of our
common stockholders. Our charter documents could defer a
takeover effort which could inhibit your ability to receive
an acquisition premium for your shares.
Our charter permits our Board of Directors to issue up to
5,000,000 shares of preferred stock without stockholder
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
9
contain dividend, liquidation, conversion, voting or other
rights which could adversely affect the rights of our common
stockholders and which could also be utilized, under some
circumstances, as a method of discouraging, delaying or
preventing a 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 stockholders believe it is in their best interest.
ITEM 2. PROPERTIES
Our facilities, including our principal executive
offices, are located at 1441 S.W. 29th Avenue, Pompano
Beach, Florida 33069. On May 31, 2001, the Company sold its
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 25, 2003 the Company 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 became
available on October 1, 2003. This addition to the
warehouse was necessary to increase the Company's capacity
to store additional inventory during our peak season. On
May 18, 2005 the Company signed an amendment to its current
lease agreement to extend the lease for 3 additional years
and exercised the option for another 3,600 square feet. The
future minimum annual lease payments are as follows:
$429,000 for fiscal 2006, $452,000 for fiscal 2007, $470,000
for fiscal 2008, $489,000 for fiscal 2009, and $82,000 for
fiscal 2010.
ITEM 3. LEGAL PROCEEDINGS
Various complaints had been filed with the Florida Board
of Pharmacy between November 2000 and March 2002. 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 Florida Pharmacy 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 certain prescriptions for
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. Based on its demonstrated
compliance with pharmacy rules and laws, effective March 11,
2004, PetMed Express was released from probation over one
year early by the Florida Board of Pharmacy. The Company
remains licensed in the State of Florida and continue to
operate its principal business in Florida.
The Company has settled other complaints that had been
filed with various other states' pharmacy boards in the
past. There can be no assurances made that other states
will not attempt to take similar actions or other actions
including denying pharmacy licensure, against the Company in
the future.
The Company is a defendant in a lawsuit, filed in August
2002, 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 commenced shortly after the filing of
the lawsuit, and at this stage of the litigation it is
difficult to assess any possible outcome or estimate any
potential loss in the event of an adverse outcome.
10
From August 17, 2004 until October 12, 2004 six
shareholder class action lawsuits were filed in the United
States District Court for the Southern District of Florida
against PetMed Express, Inc. and certain of the Company's
officers and directors for alleged violations of the federal
securities laws. These complaints alleged violations of the
anti-fraud provision contained in Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5, thereunder
and asserted violations of Section 20(a) of that act against
the individual defendants as controlling persons. The
actions purported to be brought on behalf of purchasers of
the Company's common stock between June 18, 2003 and
July 26, 2004, and the complaints generally alleged that the
defendants made false or misleading statements concerning
the Company's business, prospects, and operations and failed
to disclose, among other things, (1) that the Company's
business allegedly depends on veterinarians, who are the
Company's competitors, to authorize prescriptions, (2) that
the Company's business model, which, in part, requires
veterinarians to authorize prescriptions, caused
veterinarians to incur certain costs and burdens, which were
supposedly shifted from the Company to the veterinarians,
(3) the existence of a supposed increase in veterinarian
refusals to comply with Company requests for prescription
authorization, (4) the Company's alleged inability to
guarantee the quality of, and maintain control over, pet
medications and the negative impact this was having on
veterinarian willingness to authorize prescriptions, and (5)
that the foregoing allegations were adversely impacting the
Company. The complaints also alleged that the individual
defendants were motivated to engage in the alleged
violations so that they could affect sales of their shares
of the Company's common stock at artificially inflated
prices. The plaintiffs sought unspecified monetary damages.
On February 1, 2005, the six shareholder class action
lawsuits against PetMed Express, Inc. and certain of the
Company's officers and directors were voluntarily dismissed
by the plaintiffs without prejudice.
Routine Proceedings
The Company is a party to routine litigation and
administrative complaints incidental to its business.
Management does not believe that the resolution of any or
all of such routine litigation and administrative complaints
are likely to have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our stockholders
during the fourth quarter of the fiscal year ended March 31,
2005.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common shares are traded on the Nasdaq
National Market ("NASDAQ") 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
2005 and 2004 as reported by the NASDAQ and the over-the-
counter bulletin board:
Fiscal 2005: High Low
First Quarter $12.29 $6.73
Second Quarter $8.10 $4.10
Third Quarter $7.61 $4.63
Fourth Quarter $8.55 $6.50
Fiscal 2004: High Low
First Quarter $5.00 $2.27
Second Quarter $8.15 $5.24
Third Quarter $9.23 $7.00
Fourth Quarter $12.96 $7.05
There were 83 holders of record of our common stock at May
31, 2005, and we estimate there were approximately 8,600
beneficial stockholders on that date.
Dividend Policy
The Company has never paid cash dividends on our common
stock. We presently intend to retain future earnings, if
any, to finance the expansion of our business and do not
anticipate that any cash dividends on our common stock will
be paid in the foreseeable future. The future dividend
policy will depend on our earnings, capital requirements,
expansion plans, financial condition and other relevant
factors.
12
ITEM 6. 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
Annual Report. The consolidated statements of operations
data set forth below for the fiscal years ended March 31,
2005, 2004, and 2003 and the consolidated balance sheet data
as of March 31, 2005 and 2004 have been derived from our
audited consolidated financial statements which are included
elsewhere in this Form 10-K. The consolidated statements of
operations data set forth below for the fiscal years ended
March 31, 2002 and 2001 and the consolidated balance sheet
data as of March 31, 2003, 2002 and 2001 have been derived
from our audited consolidated financial statements which are
not included in this Form 10-K.
STATEMENTS OF OPERATIONS
Fiscal Year Ended March 31,
_______________________________________________________________________________________
2005 2004 2003 2002 2001
_______________________________________________________________________________________
Sales $ 108,357,747 $ 93,994,233 $ 54,974,916 $ 32,025,931 $ 10,006,285
Cost of sales 64,700,002 55,824,406 31,517,639 18,894,493 6,367,604
Gross profit 43,657,745 38,169,827 23,457,277 13,131,438 3,638,681
Operating expenses 31,156,119 28,958,433 19,974,270 12,383,498 6,277,779
Net income (loss) 8,010,370 5,813,604 3,257,565 825,413 (2,826,707)
Net income (loss) per common share:
Basic 0.35 0.30 0.19 0.05 (0.28)
Diluted 0.34 0.25 0.16 0.04 (0.28)
Weighted average number of
common shares outstanding:
Basic 22,862,417 19,471,681 17,300,130 16,360,010 9,943,625
Diluted 23,833,189 23,689,866 20,749,515 19,739,493 9,943,625
BALANCE SHEET DATA
March 31,
_______________________________________________________________________________________
2005 2004 2003 2002 2001
_______________________________________________________________________________________
Working capital (deficit) $ 21,968,784 $ 11,338,004 $ 3,017,641 $ 690,588 $ (2,473,349)
Total assets 28,119,483 18,480,808 9,025,796 4,654,236 4,504,757
Total liabilities 3,902,419 4,486,299 3,433,108 3,071,536 3,747,470
Shareholders' equity 24,217,064 13,994,509 5,592,688 1,582,700 757,287
NON FINANCIAL DATA (UNAUDITED)
March 31,
_______________________________________________________________________________________
2005 2004 2003 2002 2001
_______________________________________________________________________________________
New customers acquired 510,000 572,000 414,000 275,000 60,000
Total accumulated customers 1,831,000 1,321,000 749,000 335,000 60,000
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Executive Summary
PetMed Express was incorporated in the state of Florida
in January 1996. The Company's common stock is traded on
the NASDAQ under the symbol "PETS." Prior to the move to
the NASDAQ, the Company's shares had been traded on the over-
the-counter bulletin board. The Company began selling pet
medications and other pet health products in September 1996,
and issued its first catalog in the fall of 1997. This
catalog displayed approximately 1,200 items, including
prescription and non-prescription pet medications, other pet
health products and pet accessories. In fiscal 2001, the
Company focused its product line on approximately 600 of the
most popular pet medications and other health products for
dogs and cats.
The Company markets its products through national
television, online, and direct mail/print advertising
campaigns which direct consumers to order by phone or on the
Internet, and aim to increase the recognition of the "1-800-
PetMeds" brand name. Currently, approximately 53% of all
sales are generated via the Internet compared to 50% last
year.
The Company's sales consist of products sold mainly to
retail consumers and minimally to wholesale customers.
Typically, the Company's customers pay by credit card or
check at the time the order is shipped. The Company usually
receives cash settlement in one to three banking days for
sales paid by credit cards, which minimizes the accounts
receivable balances relative to the Company's sales.
Certain wholesale customers are extended credit terms, which
usually require payment within 30 days of delivery. The
Company's sales returns average was approximately 1.4 % of
sales for both the fiscal years ended March 31, 2005 and
2004. The twelve month average purchase was approximately
$76 and $73 per order for the fiscal years ended March 31,
2005 and 2004, respectively.
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. The Company's 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
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.
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
accounts receivable balances relative to 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 funds checks. The
Company determines its estimates of the uncollectibility of
accounts receivable by analyzing historical bad debts and
current economic trends. At March 31, 2005 and 2004 the
allowance for doubtful accounts was approximately $37,000
and $23,000, respectively.
Valuation of inventory
Inventories consist of prescription and non-prescription
pet medications and pet supplies 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. The inventory reserve
was approximately $228,000 for both the fiscal years ended
March 31, 2005 and 2004.
14
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 a comparison of the carrying amount of
the asset to net future cash flows expected to be generated
from the asset.
Advertising
The Company's advertising expense consists primarily of
television advertising, internet marketing, and direct
mail/print advertising. Television costs are expensed as
the advertisements are televised. Internet costs are
expensed in the month incurred and direct mail/print
advertising costs are expensed when the related catalog and
postcards are produced, distributed or superseded.
Accounting for 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
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
The following should be read in conjunction with the
Company's 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 the Company's Consolidated Statements of
Income:
Fiscal Year Ended March 31,
2005 2004 2003
------- ------- -------
Sales 100.0 % 100.0 % 100.0 %
Cost of sales 59.7 59.4 57.3
------- ------- -------
Gross profit 40.3 40.6 42.7
------- ------- -------
Operating expenses:
General and administrative 10.6 11.4 14.5
Advertising 17.7 18.8 21.2
Depreciation and amortization 0.5 0.6 0.7
------- ------- -------
Total operating expenses 28.8 30.8 36.4
------- ------- -------
Income from operations 11.5 9.8 6.3
------- ------- -------
Total other income (expense) 0.1 - -
------- ------- -------
Income before provision for income taxes 11.6 9.8 6.3
Provision for income taxes 4.2 3.6 0.4
------- ------- -------
Net income 7.4 % 6.2 % 5.9 %
======= ======= =======
15
Fiscal 2005 Compared to Fiscal 2004
Sales
- -----
Sales increased $14,364,000, or 15.3%, to $108,358,000 for
the year ended March 31, 2005, from $93,994,000 for the year
ended March 31, 2004. The increase in sales can be
primarily attributed to increased retail reorders and
wholesale sales, partially offset by decreased retail new
order sales during the fiscal year.
The Company has committed certain amounts specifically
designated towards television, direct mail/print and online
advertising to stimulate sales, create brand awareness, and
acquire new customers. Retail reorder sales have increased
by approximately $17,285,000, or 33.6%, to approximately
$68,719,000 for the fiscal year ended March 31, 2005, from
approximately $51,434,000 for the fiscal year ended March
31, 2004. Retail new order sales have decreased by
approximately $4,908,000, or 11.7%, to approximately
$37,208,000 for the fiscal year ended March 31, 2005, from
approximately $42,116,000 for the fiscal year ended March
31, 2004. Wholesale sales have increased by approximately
$1,987,000, or 447%, to approximately $2,431,000 for the
fiscal year ended March 31, 2005, from approximately
$444,000 for the fiscal year ended March 31, 2004. The
Company acquired approximately 510,000 new customers for the
year ended March 31, 2005, compared to 572,000 new customers
for the same period in the prior year. The slow down in
retail sales growth for fiscal 2005 compared to fiscal 2004
can be attributed to decreased advertising efficiency and
increased competition both from veterinarians and
traditional and online retailers.
The majority of our product sales are affected by the
seasons, due to the seasonality of mainly heartworm and flea
and tick medications. For the quarters ended June 30,
September 30, December 31, and March 31 of fiscal 2005, the
Company's sales were approximately 33%, 26%, 19%, and 22%,
respectively.
Cost of sales
- -------------
Cost of sales increased by $8,876,000, or 15.9%, to
$64,700,000 for the fiscal year ended March 31, 2005, from
$55,824,000 for the fiscal year ended March 31, 2004. The
increase in cost of sales is directly related to the
increase in retail and wholesale sales in fiscal 2005 as
compared to fiscal 2004. As a percent of sales, the cost of
sales was 59.7% in fiscal 2005, as compared to 59.4% in
fiscal 2004. The percentage increase can be attributed to
increases in wholesale sales which had a higher cost of
sales percentage.
Gross profit
- ------------
Gross profit increased by $5,488,000, or 14.4%, to
$43,658,000 for the fiscal year ended March 31, 2005, from
$38,170,000 for the fiscal year ended March 31, 2004. Gross
profit as a percentage of sales for fiscal 2005 and 2004 was
40.3% and 40.6%, respectively. The percentage decrease can
be attributed to increases in wholesale sales which had a
lower gross profit percentage.
General and administrative expenses
- -----------------------------------
General and administrative expenses increased by $642,000,
or 6.0%, to $11,396,000 for the fiscal year ended March 31,
2005 from $10,754,000 for the fiscal year ended March 31,
2004. However, general and administrative expense as a
percentage of sales was 10.6% and 11.4% for the fiscal years
ended March 31, 2005 and 2004, respectively. The increase
in general and administrative expenses for the year ended
March 31, 2005 was primarily due to the following: a
$336,000 increase in bank service and credit card fees which
can be directly attributed to increased sales in fiscal
2005; a $259,000 increase to payroll expenses due to the
addition of new employees in the customer care and pharmacy
departments enabling the company to sustain its growth; a
$106,000 increase to property expenses relating to
additional rent due to our warehouse expansion; a $97,000
increase in insurance expenses, relating to additional
premiums paid for increases to insurance policy limits; and
a $70,000 increase in other expenses which includes mainly
office expenses. Offsetting the increase were an $113,000
reduction to telephone expenses, relating to one time usage
credits received in fiscal 2005, and an $113,000 reduction
to professional fees primarily from a one-time NASDAQ
listing fee in fiscal 2004.
Advertising expenses
- --------------------
Advertising expenses increased by approximately
$1,532,000, or approximately 8.7%, to approximately
$19,186,000 for the fiscal year ended March 31, 2005 from
approximately $17,654,000 for the fiscal year ended March
31, 2004. The increase in advertising expenses for the
fiscal year ended March 31, 2005 was due to the Company's
plan to commit certain amounts specifically designated
towards television, direct mail/print, and online
advertising to stimulate sales, create brand awareness, and
acquire new customers.
16
The advertising costs of acquiring a new customer, defined
as total advertising costs divided by new customers
acquired, for the fiscal year ended March 31, 2005 was $38,
compared to $31 for the same period the prior year. We can
attribute this decrease in advertising efficiency for the
year ended March 31, 2005 compared to 2004 to the change in
the advertising media mix caused by a shortage of television
advertising inventory, which was due to increased advertiser
demand resulting from the strengthening economy and the
presidential election. The decrease in advertising
efficiency may also be attributable to increased competition
from both veterinarians and traditional and online
retailers. As a percentage of sales, advertising expense
was 17.7% in fiscal 2005, as compared to 18.8% in fiscal
2004. The percentage decrease can also be attributed to the
shortage of television advertising inventory mentioned
above. The Company expects advertising as a percentage of
sales to range from approximately 17.0% to 20.0% in fiscal
2006. However, the advertising percentage will fluctuate
quarter to quarter due to seasonality and advertising
availability.
Depreciation and amortization
- -----------------------------
Depreciation and amortization increased by approximately
$24,000, or 4.3%, to approximately $574,000 for the fiscal
year ended March 31, 2005 from approximately $550,000 for
the fiscal year ended March 31, 2004. The increase to
depreciation and amortization expense for fiscal 2005 can be
attributed to property and equipment additions.
Interest income
- ---------------
Interest income increased by approximately $89,000, or
917%, to approximately $99,000 for the fiscal year ended
March 31, 2005 from approximately $10,000 for the fiscal
year ended March 31, 2004. The increase to interest income
can be attributed to increases in the Company's cash
balance, which is swept into an interest bearing overnight
account and tax-free short term investment accounts.
Interest income may decrease in future years as the Company
utilizes its cash balances to increase inventory levels.
Provision for income taxes
- --------------------------
For the fiscal years ended March 31, 2005 and 2004, the
Company recorded an income tax provision for approximately
$4,593,000 and $3,400,000, respectively, which resulted in
an effective tax rate of 36.4% and 36.9%, respectively.
Net income
- ----------
Net income increased by approximately $2,196,000, or
37.8%, to approximately $8,010,000 for the fiscal year ended
March 31, 2005 from approximately $5,814,000 for the fiscal
year ended March 31, 2004. The significant increase was
mainly attributable to the Company's sales growth and
profitable operations and the leverage of general and
administrative and advertising expenses.
Fiscal 2004 Compared to Fiscal 2003
Sales
- -----
Sales increased $39,019,000, or 71.0%, to $93,994,000 for
the year ended March 31, 2004, from $54,975,000 for the year
ended March 31, 2003. The increase in sales can be
primarily attributed to increased retail reorders and the
positive effects generated from our advertising campaign.
Additionally, the Company's free shipping promotion, which
was initiated in March 2003, had a positive impact on sales.
The Company has 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 $13,201,000, or 45.7%, to approximately
$42,116,000 for the fiscal year ended March 31, 2004, from
approximately $28,915,000 for the fiscal year ended March
31, 2003. Retail reorder sales have increased by
approximately $25,607,000, or 99.1%, to approximately
$51,434,000 for the fiscal year ended March 31, 2004, from
approximately $25,827,000 for the fiscal year ended March
31, 2003. Wholesale sales have increased by approximately
$211,000, or 91.5%, to approximately $444,000 for the fiscal
year ended March 31, 2004, from approximately $233,000 for
the fiscal year ended March 31, 2003. The Company acquired
approximately 572,000 new customers for the year ended March
31, 2004, compared to 414,000 new customers for the same
period in the 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. The Company
cannot accurately predict
17
future sales, however, based on current circumstances
the Company does not expect a significant variance
compared to the industry trends in the first quarter of
fiscal 2005.
Cost of sales
- -------------
Cost of sales increased by $24,306,000, or 77.1%, to
$55,824,000 for the fiscal year ended March 31, 2004, from
$31,518,000 for the fiscal year ended March 31, 2003. The
increase in cost of sales is directly related to the
increase in retail sales in fiscal 2004 as compared to 2003.
As a percent of sales, the cost of sales was 59.4% in fiscal
2004, as compared to 57.3% in fiscal 2003. This percentage
increase can be directly attributed to the Company's free
shipping promotion, with a portion offset by increases in
our product pricing.
Gross profit
- ------------
Gross profit increased by $14,713,000, or 62.7%, to
$38,170,000 for the fiscal year ended March 31, 2004 from
$23,457,000 for the fiscal year ended March 31, 2003. Gross
profit as a percentage of sales for fiscal 2004 and 2003 was
40.6% and 42.7%, respectively. This percentage decrease can
be directly attributed to the Company's free shipping
promotion, with a portion offset by increases in our product
pricing.
General and administrative expenses
- -----------------------------------
General and administrative expense increased by
$2,797,000, or 35.2%, to $10,754,000 for the fiscal year
ended March 31, 2004 from $7,957,000 for the fiscal year
ended March 31, 2003. However, general and administrative
expense as a percentage of sales was 11.4% and 14.5% for the
fiscal years ended March 31, 2004 and 2003, respectively.
The increase in general and administrative expense for the
year ended March 31, 2004 was primarily due to the
following: a $1,265,000 increase to payroll expenses which
can be attributed to the addition of new employees in the
customer service and pharmacy departments, which enabled the
company to sustain its continued growth; a $792,000 increase
to bank service and credit card fees which can be directly
attributed to increased sales in fiscal 2004; a $357,000
increase to professional fees, of which $107,000 related to
NASDAQ listing fees; a $151,000 increase to telephone
expenses which is directly attributed to increased sales in
fiscal 2004; a $148,000 increase in insurance expenses,
which related to additional premium paid for property
insurance on our increased inventory and directors and
officer insurance; and a $84,000 increase in other expenses
which includes mainly property, and other related office
expenses.
Advertising expenses
- --------------------
Advertising expenses increased by approximately
$6,004,000, or approximately 51.5%, to approximately
$17,654,000 for the fiscal year ended March 31, 2004 from
approximately $11,650,000 for the fiscal year ended March
31, 2003. The increase in advertising expense for the
fiscal year ended March 31, 2004 was due to the Company's
plan to commit certain amounts specifically designated
towards television and direct mail advertising to stimulate
sales, create brand awareness, and acquire new customers.
As a percent of sales, advertising expense was 18.8% in
fiscal 2004, as compared to 21.2% in fiscal 2003. The
Company expects advertising as a percent of sales to range
approximately from 18.0% to 22.0% in fiscal 2005. However
that advertising percentage will fluctuate quarter to
quarter due to seasonality and advertising availability.
Depreciation and amortization
- -----------------------------
Depreciation and amortization increased by approximately
$182,000, or 49.7%, to approximately $550,000 for the fiscal
year ended March 31, 2004 from approximately $368,000 for
the fiscal year ended March 31, 2003. The increase to
depreciation and amortization expense for fiscal 2004 can be
attributed to increased property and equipment additions
mainly related to the Company's warehouse expansion.
Gain or loss on disposal of property and equipment
- --------------------------------------------------
In fiscal 2003, the Company recorded a gain on disposal of
computer equipment of $15,000. The fully depreciated
computer equipment was sold to an unrelated third party and
the Company received gross proceeds of $15,000. There was
no related gain or loss on disposal of property and
equipment in fiscal 2004.
Interest expense
- -----------------
Interest expense decreased by approximately $16,000, or
52.6%, to approximately $15,000 for the fiscal year ended
March 31, 2004 from approximately $31,000 for the fiscal
year ended March 31, 2003. The $15,000 decrease can be
attributed to a reduction of the utilization of the
Company's $5,000,000 line of credit. Interest expense may
increase in future quarters, due to the Company utilizing
its $5,000,000 line of credit to increase inventory levels.
18
Provision for income taxes
- --------------------------
The Company had incurred significant net losses since its
inception in 1996, through the quarter ended June 30, 2001.
These losses have resulted in net operating loss
carryforwards, which have been used by the Company to offset
its tax liabilities. For the fiscal year ended March 31,
2002, the Company 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 the Company's ability to generate taxable
income. For the fiscal year ended March 31, 2003, the
Company recognized a deferred income tax asset of
approximately $581,000, due to the fact that the Company had
demonstrated the ability to generate taxable income. The
use of future net operating loss carryforwards is limited to
approximately $266,000 annually; due to the November 22,
2000 change of control. There are no guarantees that the
Company will be able to utilize all future net operating
loss carryforwards, unless the Company generates taxable
income. For the fiscal years ended March 31, 2004 and 2003,
the Company recorded an income tax provision for
approximately $3,400,000 and $223,000, respectively. The
effective tax rate for fiscal 2004 was 36.9% compared to
6.4% for fiscal 2003. This difference is primarily due to
the utilization of prior net operating losses, which offset
taxable income for the period, and the recognition of the
deferred tax asset in fiscal 2003. Upon recognition of the
$581,000 deferred income tax asset, the Company reduced its
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 $2,556,000, or
78.5%, to $5,814,000 net income for the fiscal year ended
March 31, 2004 from $3,258,000 net income for the fiscal
year ended March 31, 2003. The significant increase was
mainly attributable to the Company's sales growth and
profitable operations.
Liquidity and Capital Resources
The Company's working capital at March 31, 2005 and
2004 was $21,969,000 and $11,338,000, respectively. The
$10,631,000 increase in working capital was primarily
attributable to cash flow generated from operations and the
exercise of stock options and warrants. Net cash provided
by operating activities was $8,349,000 and $1,106,000 for
the years ended March 31, 2005 and 2004, respectively. Net
cash used in investing activities was $172,000 and $742,000
for the years ended March 31, 2005 and 2004, respectively.
This $570,000 decrease can be attributed to less property
and equipment acquisitions in fiscal 2005 than fiscal 2004.
Net cash provided by financing activities was $1,225,000 and
$1,931,000 for the years ended March 31, 2005 and 2004.
This $706,000 decrease can be attributed to a decrease in
the number of stock options and warrants being exercised in
fiscal 2005 than fiscal 2004.
Since its inception, the Company has primarily funded its
growth through the private placement of securities. The
Company had financed certain equipment acquisitions with
capital leases. As of March 31, 2005 and 2004 the Company
had no outstanding lease commitments except for the lease
for its executive offices and warehouse ("facility").
On July 25, 2003 the Company 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 became
available on October 1, 2003. This addition to the
warehouse was necessary to increase the Company's capacity
to store additional inventory during our peak season. On
May 18, 2005 the Company signed an amendment to extend the
current lease agreement through May 31, 2009. The amendment
terms are similar to the existing lease agreement, and the
Company exercised its option to lease an additional 3,600
square feet. Under the terms of the new amendment the
Company will be leasing 43,000 square feet.
The Company's $5,000,000 line of credit with SouthTrust
Bank, N.A. expired on August 28, 2004. On November 2, 2004
the Company signed a new $6,000,000 line of credit agreement
with RBC Centura Bank. The $6,000,000 line of credit, which
upon 30 days notice has a provision to increase the line to
$7,500,000, is effective through November 2, 2005, and the
interest rate is at the published thirty day London
Interbank Offered Rates ("LIBOR") plus 1.50% (4.35% and
3.50% at March 31, 2005 and 2004, respectively), and
contains various financial and operating covenants. At
March 31, 2005 and 2004, there was no balance outstanding
under either 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%.
The loan proceeds were used to purchase a $250,000 computer
server. The aggregate loan maturities were approximately
$68,000 per year for three years. At March 31, 2005, there
was no balance outstanding under the term loan agreement and
a $68,000 balance at March 31, 2004.
19
Presently, the Company has approximately $300,000 planned
for capital expenditure commitments to further the Company's
growth during fiscal 2006, which will be funded through cash
from operations. The Company's sources of working capital
include the line of credit, cash from operations, and the
exercise of stock options and warrants. The Company
presently has no need for other alternative sources of
working capital and at this time, have no commitments or
plans to obtain additional capital. If in the future, the
Company seeks to raise additional capital through the sale
of equity securities, no assurances can be given that the
Company will be successful in obtaining additional capital,
or that such capital will be available in terms acceptable
to the Company. Further, there can be no assurances that
even if such additional capital is obtained that the Company
will sustain profitability or positive cash flow.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards
Board issued SFAS No. 123R, Share Based Payment, which is a
revision of SFAS No. 123. This Statement supersedes APB
No. 25, which is the basis for the Company's current policy
on accounting for stock-based compensation. SFAS No. 123R
will require companies to recognize as an expense in the
Statement of Income the grant-date fair value of stock
options and other equity-based compensation issued to
employees. SFAS No. 123R is effective for the Company as of
April 1, 2006, the beginning of the first quarter in fiscal
2007. Under the methods of adoption allowed by the
standard, awards that are granted, modified, or settled
after the date of adoption should be measured and accounted
for in accordance with SFAS No. 123R. The fair value of
unvested equity-classified awards that were granted prior to
the effective date should continue to be accounted for in
accordance with SFAS No. 123 except that compensation
amounts must be recognized in the Statement of Income.
Previously reported amounts may be restated (either to the
beginning of the year of adoption or for all periods
presented) to reflect the SFAS No. 123R amounts in the
Statement of Income. Pro-forma disclosures about the fair
value method and the impact on net income and net income per
common share appear in Notes 1 to the Consolidated Financial
Statements. The Company is evaluating the requirements of
SFAS No. 123R and expects that the adoption of SFAS No. 123R
will have a material impact on its consolidated statements
of income and earnings per share.
The Company does not believe that any other 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.
20
ITEM 7A. 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
values of cash equivalents, accounts receivable, and
accounts payable are considered to be representative of fair
value because of the short maturity of these instruments.
At March 31, 2005 we had no debt obligations.
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 June 3, 2005, 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 June 3, 2005 would not have a
material impact on our annual 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.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PETMED EXPRESS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm 23
Consolidated Balance Sheets as of March 31, 2005 and March 31, 2004 24
Consolidated Statements of Income for each of the three
years in the period ended March 31, 2005 25
Consolidated Statements of Changes in Shareholders' Equity for
each of the three years in the period ended March 31, 2005 26
Consolidated Statements of Cash Flows for each of the three
years in the period ended March 31, 2005 27
Notes to Consolidated Financial Statements 28
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005 and 2004, and the related consolidated
statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended
March 31, 2005. 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 the standards of
the Public Company Accounting Oversight Board (United
States). 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, 2005 and 2004, and the
results of their operations and their cash flows for each of
the three years in the period ended March 31, 2005, in
conformity with U.S. generally accepted accounting
principles.
/s/ Goldstein Golub Kessler LLP
- --------------------------------
Goldstein Golub Kessler LLP
April 30, 2005, except for the last paragraph of
note 11, as to which the date is May 18, 2005
New York, New York
23
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
2005 2004
------------- --------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 12,680,962 $ 3,278,926
Accounts receivable, less allowance for doubtful
accounts of $37,000 and $23,000, respectively 1,796,756 1,133,301
Inventories - finished goods 11,180,333 11,179,858
Prepaid expenses and other current assets 213,152 232,218
------------- --------------
Total current assets 25,871,203 15,824,303
Property and equipment, net 1,286,267 1,688,327
Deferred income taxes 582,846 581,356
Intangible asset 365,000 365,000
Other assets 14,167 21,822
------------- --------------
Total assets $ 28,119,483 $ 18,480,808
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,724,990 $ 3,273,062
Income taxes payable 601,535 422,445
Accrued expenses and other current liabilities 575,894 722,350
Current portion of loan obligation - 68,442
------------- --------------
Total liabilities 3,902,419 4,486,299
------------- --------------
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; 23,458,725 and 21,860,057 shares
issued and outstanding, respectively 23,459 21,860
Additional paid-in capital 12,074,611 9,864,025
Retained earnings 12,110,096 4,099,726
------------- --------------
Total shareholders' equity 24,217,064 13,994,509
------------- --------------
Total liabilities and shareholders' equity $ 28,119,483 $ 18,480,808
============= ==============
See accompanying notes to consolidated financial statements
24
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended March 31,
2005 2004 2003
-------------- ------------- -------------
Sales $ 108,357,747 $ 93,994,233 $ 54,974,916
Cost of sales 64,700,002 55,824,406 31,517,639
-------------- ------------- -------------
Gross profit 43,657,745 38,169,827 23,457,277
-------------- ------------- -------------
Operating expenses:
General and administrative 11,396,320 10,754,427 7,956,786
Advertising 19,185,982 17,653,614 11,649,811
Depreciation and amortization 573,817 550,392 367,673
-------------- ------------- -------------
Total operating expenses 31,156,119 28,958,433 19,974,270
-------------- ------------- -------------
Income from operations 12,501,626 9,211,394 3,483,007
-------------- ------------- -------------
Other income (expense):
Gain on disposal of property and equipment - - 15,000
Interest expense (965) (14,546) (30,658)
Interest income 99,044 9,739 6,973
Other, net 3,710 6,938 6,084
-------------- ------------- -------------
Total other income (expense) 101,789 2,131 (2,601)
-------------- ------------- -------------
Income before provision for income taxes 12,603,415 9,213,525 3,480,406
Provision for income taxes 4,593,045 3,399,921 222,841
-------------- ------------- -------------
Net income $ 8,010,370 $ 5,813,604 $ 3,257,565
============== ============= =============
Net income per common share:
Basic $ 0.35 $ 0.30 $ 0.19
============== ============= =============
Diluted $ 0.34 $ 0.25 $ 0.16
============== ============= =============
Weighted average number of common shares outstanding:
Basic 22,862,417 19,471,681 17,300,130
============== ============= =============
Diluted 23,833,189 23,689,866 20,749,515
============== ============= =============
See accompanying notes to consolidated financial statements
25
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Fiscal years ended March 31, 2003, March 31, 2004 and March 31, 2005
Retained
Convertible Common Additional Earnings
Preferred Stock Stock Paid-In (Accumulated
-------------------------- ----------------------
Shares Amounts Shares Amounts Capital Deficit) Total
---------------------------------------------------------------------------------------------------
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
Issuance of common
stock from exercise of
stock options - - 1,179,596 1,179 1,285,366 - 1,286,545
Issuance of common
stock from exercise of
warrants - - 2,219,583 2,220 710,580 - 712,800
Tax benefit related to
stock options exercised - - - - 588,872 - 588,872
Net income - - - - - 5,813,604 5,813,604
----------- ---------------- ------------- ------------ -------------- -------------- -------------
Balance, March 31, 2004 2,500 8,898 21,860,057 21,860 9,864,025 4,099,726 13,994,509
Issuance of common
stock from exercise of
stock options - - 1,058,668 1,059 1,076,130 - 1,077,189
Issuance of common
stock from exercise of
warrants and other - - 540,000 540 215,707 - 216,247
Tax benefit related to
stock options exercised - - - - 918,749 - 918,749
Net income - - - - - 8,010,370 8,010,370
----------- ---------------- ------------- ------------ -------------- -------------- -------------
Balance, March 31, 2005 2,500 $ 8,898 23,458,725 $ 23,459 $ 12,074,611 $ 12,110,096 $ 24,217,064
=========== ================ ============= ============ ============== ============== =============
See accompanying notes to consolidated financial statements
26
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
2005 2004 2003
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 8,010,370 $ 5,813,604 $ 3,257,565
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 573,817 550,392 367,673
Tax benefit related to stock options exercised 918,749 588,872 171,587
Gain on disposal of property and equipment - - (15,000)
Deferred income taxes (1,490) - (581,356)
Bad debt expense 16,092 7,432 15,027
(Increase) decrease in operating assets and liabilities:
Accounts receivable (679,547) (488,850) (375,397)
Inventories (475) (6,911,712) (1,961,526)
Prepaid expenses and other current assets 19,066 245,890 (329,500)
Other assets 7,655 178,333 (150,000)
Accounts payable (548,072) 702,603 696,535
Income taxes payable 179,090 251,693 170,752
Accrued expenses and other current liabilities (146,456) 167,338 (296,059)
------------- ------------- -------------
Net cash provided by operating activities 8,348,799 1,105,595 970,301
------------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (171,757) (741,740) (744,596)
Purchases of intangible asset - - (365,000)
Net proceeds from the sale of property and equipment - - 15,000
------------- ------------- -------------
Net cash used in investing activities (171,757) (741,740) (1,094,596)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants
and other transactions 1,293,436 1,999,345 580,836
Payments on the line of credit - - (141,214)
Payments on the loan obligation (68,442) (68,443) (68,442)
------------- ------------- -------------
Net cash provided by financing activities 1,224,994 1,930,902 371,180
------------- ------------- -------------
Net increase in cash and cash equivalents 9,402,036 2,294,757 246,885
Cash and cash equivalents, at beginning of period 3,278,926 984,169 737,284
------------- ------------- -------------
Cash and cash equivalents, at end of period $ 12,680,962 $ 3,278,926 $ 984,169
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 884 $ 14,302 $ 30,675
============= ============= =============
Cash paid for income taxes $ 3,496,696 $ 2,513,214 $ 508,000
============= ============= =============
See accompanying notes to consolidated financial statements
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Organization
PetMed Express, Inc. and subsidiaries, d/b/a 1-800-PetMeds, (the
"Company") is a leading nationwide pet pharmacy. The Company
markets prescription and non-prescription pet medications and
other health products for dogs, cats and horses direct to the
consumer.
The Company markets its products through national television,
online and direct mail/print advertising campaigns, which aim to
increase the recognition of the "1-800-PetMeds" brand name,
increase traffic on its website at www.1800petmeds.com, acquire
-------------------
new customers, and maximize repeat purchases. The majority of
all of the Company's sales are to residents in the United States.
The Company's executive offices are located in Pompano Beach,
Florida.
The Company's fiscal year end is March 31. References herein to
fiscal 2005, 2004, or 2003 refer to the Company's fiscal years
ended March 31, 2005, 2004 and 2003, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its two 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. 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 the accounts receivable
balances relative to sales. The Company maintains an allowance
for doubtful accounts for losses that the Company estimates will
arise from 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, 2005 and
2004 the allowance for doubtful accounts was approximately
$37,000 and $23,000, 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, 2005 and 2004, 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 accounting principles generally accepted 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.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (Continued)
Inventories
Inventories consist of prescription and non-prescription pet
medications and pet supplies 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. The inventory reserve was approximately
$228,000 at both March 31, 2005 and 2004.
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 September 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, and direct mail/print
advertising. Television costs are expensed as the advertisements
are televised. Internet costs are expensed in the month incurred
and direct mail/print advertising costs are expensed when the
related catalog and postcards are produced, distributed or
superseded.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (Continued)
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, 2005 2004 2003
-------------------- ----------- ----------- -----------
Reported net income: $ 8,010,370 $ 5,813,604 $ 3,257,565
Deduct: total stock-based employee
compensation expense determined under
fair-value based method for all awards,
net of related tax effects 501,244 289,907 285,258
----------- ----------- -----------
Pro forma net income: $ 7,509,126 $ 5,523,697 $ 2,972,307
=========== =========== ===========
Reported basic net income per share: $ 0.35 $ 0.30 $ 0.19
=========== =========== ===========
Pro forma basic net income per share: $ 0.33 $ 0.28 $ 0.17
=========== =========== ===========
Reported diluted net income per share: $ 0.34 $ 0.25 $ 0.16
=========== =========== ===========
Pro forma diluted net income per share: $ 0.32 $ 0.23 $ 0.14
=========== =========== ===========
The per share weighted-average fair value of stock options
granted during fiscal 2005, 2004, and 2003 was $5.45, $4.13, and
$1.28, 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 86 percent, 68 percent,
and 62 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.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued
SFAS No. 123R, Share Based Payment, which is a revision of SFAS
No. 123. This Statement supersedes APB No. 25, which is the
basis for the Company's current policy on accounting for stock-
based compensation. SFAS No. 123R will require companies to
recognize as an expense in the Statement of Income the grant-date
fair value of stock options and other equity-based compensation
issued to employees. SFAS No. 123R is effective for the Company
as of April 1, 2006, the beginning of the first quarter in fiscal
2007. Under the methods of adoption allowed by the standard,
awards that are granted, modified, or settled after the date of
adoption should be measured and accounted for in accordance with
SFAS No. 123R. The fair value of unvested equity-classified
awards that were granted prior to the effective date should
continue to be accounted for in accordance with SFAS No. 123
except that compensation amounts must be recognized in the
Statement of Income. Previously reported amounts may be restated
(either to the beginning of the year of adoption or for all
periods presented) to reflect the SFAS No. 123R amounts in the
Statement of Income. Pro forma disclosures about the fair value
method and the impact on net income and net income per common
share appear in the above table. The Company is evaluating the
requirements of SFAS No. 123R and expects that the adoption of
SFAS No. 123R will have a material impact on its consolidated
statements of income and earnings per share.
The Company does not believe that any other 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,
2005 2004
------------ -------------
$ $
Leasehold improvements 384,445 379,259
Computer software 391,197 390,787
Furniture, fixtures and equipment 2,361,438 2,195,277
Equipment and software under capital lease 113,398 113,398
------------ -------------
3,250,478 3,078,721
Less: accumulated depreciation and amortization (1,964,211) (1,390,394)
------------ -------------
Property and equipment, net $ 1,286,267 $ 1,688,327
============ =============
Amortization expense for equipment and software under capital
leases was approximately $10,000, $35,000, and $24,000, for the
years ended March 31, 2005, 2004, and 2003, respectively.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Accrued Expenses
Major classifications of accrued expenses consist of the
following:
March 31,
2005 2004
---------- ----------
Accrued salaries $ 84,706 $ 290,722
Accrued legal expenses 78,000 88,000
Accrued advertising expenses 177,000 72,000
Other accrued liabilities 236,188 271,628
---------- ----------
Accrued expenses $ 575,894 $ 722,350
========== ==========
(4) Line of Credit Agreement and Loan Obligation
The Company's $5,000,000 line of credit with SouthTrust Bank,
N.A. expired on August 28, 2004. On November 2, 2004 the Company
signed a new $6,000,000 line of credit agreement with RBC Centura
Bank. The $6,000,000 line of credit, which upon 30 days notice
has a provision to increase the line to $7,500,000, is effective
through November 2, 2005, and the interest rate is at the
published thirty day London Interbank Offered Rates ("LIBOR")
plus 1.50% (4.35% at March 31, 2005), and contains various
financial and operating covenants. At March 31, 2005 and 2004,
there was no balance outstanding under either 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%. The loan proceeds were
used to purchase a $250,000 computer server. The aggregate loan
maturities were approximately $68,000 per year for three years.
The line of credit is secured by substantially all of the
Company's assets.
(5) Shareholders' Equity
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 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, 2005 and 2004, 2,500 shares of the convertible preferred
stock remained unconverted and outstanding.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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,
2005 2004
------------ ------------
Deferred tax assets:
Bad debt and inventory reserves $ 97,941 $ 94,507
Accrued expenses 132,095 141,246
Net operating loss carryforward 1,218,715 1,339,699
------------ ------------
Deferred tax assets 1,448,751 1,575,452
Less: valuation allowance (717,549) (803,902)
------------ ------------
Total deferred tax assets 731,202 771,550
Deferred tax liabilities:
Depreciation (148,356) (190,194)
------------ ------------
Total net deferred taxes $ 582,846 $ 581,356
============ ============
The change in the valuation allowance for the years ended March
31, 2005 and 2004 was approximately $86,000 and $135,000,
respectively. At March 31, 2005, the Company had net operating
loss carryforwards of approximately $3,294,000. 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.
The components of the income tax provision consist of the
following:
Year Ended March 31,
2005 2004
------------ ------------
Current taxes
Federal $ 3,911,564 $ 2,902,988
State 682,971 496,933
------------ ------------
Total current taxes 4,594,535 3,399,921
------------ ------------
Deferred taxes
Federal (1,490) -
State - -
------------ ------------
Total deferred taxes (1,490) -
------------ ------------
Total provision for income taxes $ 4,593,045 $ 3,399,921
============ ============
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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,
2005 2004 2003
------------ ------------ ------------
Income taxes at U.S. statutory rates $ 4,285,161 $ 3,132,599 $ 1,183,338
State income taxes, net of federal tax benefit 457,504 334,451 126,339
Permanent differences 9,178 992 1,512
Other (72,445) 66,743 177,763
Change in valuation allowance (86,353) (134,864) (1,266,111)
------------ ------------ ------------
Total provision for income taxes $ 4,593,045 $ 3,399,921 $ 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 and key employees, and nonqualified
options to directors, 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 1,166,002 and 2,019,337 options outstanding under the
Plan at March 31, 2005 and 2004, 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, 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
Options Granted 455,500 7.94
Options Exercised (1,179,596) 1.09
Options Canceled (167) 4.50
------------ --------------
Balance at March 31, 2004 2,019,337 2.60
Options Granted 230,500 8.18
Options Exercised (1,058,668) 1.02
Options Canceled (25,167) 4.66
------------ --------------
Balance at March 31, 2005 1,166,002 $ 5.10
============ ==============
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Stock Options and Warrants (Continued)
The following table summarizes information for options currently
outstanding and exercisable at March 31, 2005:
Options Outstanding Options Exercisable
------------------------------ ----------------------
Weighted- Weighted- Weighted-
average average average
Exercise Remaining Exercise Exercise
Price Range Number Life Price Number Price
--------------- ------------------------------ -------------------
$ 0.35 - $ 0.86 117,501 4.20 years $ 0.64 117,501 $ 0.64
1.05 - 1.90 400,000 4.10 years 1.30 290,000 1.31
3.45 - 6.50 163,001 4.24 years 3.92 37,667 3.45
8.00 - 10.64 485,500 4.16 years 9.69 101,666 10.16
--------------- ------------------------------ -------------------
$ 0.35 - $10.64 1,166,002 4.11 years $ 5.10 546,834 $ 2.96
=============== ============================== ===================
At March 31, 2005 and 2004, the number of options exercisable was
546,834 and 1,223,834, respectively, and the weighted-average
exercise price of those options was $2.96 and $0.97,
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 were
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. At March
31, 2005 all of the 3,000,000 warrants issued on November 22,
2000 were exercised.
In July 2003, J.W. Genesis exercised 59,583 warrants via a
cashless exercise, forfeiting 15,417 shares. The Company did not
receive proceeds upon exercise of these warrants.
(8) Related Party Transactions
Guven Kivilcim, a former member of Tricon and a former member of
the Company's Board of Directors, has an interest in Intelligent
Switching & Software LLC, and Numind Software Systems, Inc.,
which the Company conducted business with during the fiscal year
ended March 31, 2003. 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 to Intelligent Switching & Software LLC,
and $45,000 to Numind Software Systems, Inc., for services during
the fiscal year ended March 31, 2003.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 issuances, 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. The
following is a reconciliation of the numerators and denominators
of the basic and diluted net income per share computations for
the periods presented:
Year Ended March 31,
2005 2004 2003
------------- ------------- -------------
Net income (numerator):
Net income $ 8,010,370 $ 5,813,604 $ 3,257,565
============= ============= =============
Shares (denominator)
Weighted average number of common shares
outstanding used in basic computation 22,862,417 19,471,681 17,300,130
Common shares issuable upon exercise
of stock options and warrants 960,647 4,208,060 3,439,260
Common shares issuable upon conversion
of preferred shares 10,125 10,125 10,125
------------- ------------- -------------
Shares used in diluted computation 23,833,189 23,689,866 20,749,515
============= ============= =============
Net income per common share:
Basic $ 0.35 $ 0.30 $ 0.19
============= ============= =============
Diluted $ 0.34 $ 0.25 $ 0.16
============= ============= =============
At March 31, 2005, 2004 and 2003, 485,500, 305,000 and 124,600
shares, respectively, of common stock options and warrants, with
a weighted average exercise price of $9.69, $10.16 and $2.43,
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,
2005 2004 2003
----------- ----------- -----------
Allowance for doubtful accounts:
Balance at beginning of period $ 22,987 $ 16,644 $ 7,475
Provision for doubtful accounts 16,092 7,702 14,759
Write-off of uncollectible accounts receivable (2,544) (1,359) (5,590)
----------- ----------- -----------
Balance at end of period $ 36,535 $ 22,987 $ 16,644
=========== =========== ===========
Valuation allowance for deferred tax assets:
Balance at beginning of period $ 803,902 $ 938,766 $ 2,204,877
(Deletions) / additions (86,353) (134,864) (1,266,111)
----------- ----------- -----------
Balance at end of period $ 717,549 $ 803,902 $ 938,766
=========== =========== ===========
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Commitments and Contingencies
Legal Matters
The Company is a defendant in a lawsuit, filed in August 2002, 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 commenced shortly after the filing of the
lawsuit, and at this stage of the litigation it is difficult to
assess any possible outcome or estimate any potential loss in the
event of an adverse outcome.
From August 17, 2004 until October 12, 2004 six shareholder class
action lawsuits were filed in the United States District Court
for the Southern District of Florida against PetMed Express, Inc.
and certain of the Company's officers and directors for alleged
violations of the federal securities laws. These complaints
alleged violations of the anti-fraud provision contained in
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-
5, thereunder and asserted violations of Section 20(a) of that
act against the individual defendants as controlling persons.
The actions purported to be brought on behalf of purchasers of
the Company's common stock between June 18, 2003 and July 26,
2004, and the complaints generally alleged that the defendants
made false or misleading statements concerning the Company's
business, prospects, and operations and failed to disclose, among
other things, (1) that the Company's business allegedly depends
on veterinarians, who are the Company's competitors, to authorize
prescriptions, (2) that the Company's business model, which, in
part, requires veterinarians to authorize prescriptions, caused
veterinarians to incur certain costs and burdens, which were
supposedly shifted from the Company to the veterinarians, (3) the
existence of a supposed increase in veterinarian refusals to
comply with Company requests for prescription authorization, (4)
the Company's alleged inability to guarantee the quality of, and
maintain control over, pet medications and the negative impact
this was having on veterinarian willingness to authorize
prescriptions, and (5) that the foregoing allegations were
adversely impacting the Company. The complaints also alleged
that the individual defendants were motivated to engage in the
alleged violations so that they could affect sales of their
shares of the Company's common stock at artificially inflated
prices. The plaintiffs sought unspecified monetary damages.
On February 1, 2005, the six shareholder class action lawsuits
against PetMed Express, Inc. and certain of the Company's
officers and directors were voluntarily dismissed by the
plaintiffs without prejudice.
Routine Proceedings
The Company is a party to routine litigation and administrative
complaints incidental to its business. Management does not
believe that the resolution of any or all of such routine
litigation and administrative complaints is likely to have a
material adverse effect on the Company's financial condition or
results of operations. The Company has settled complaints that
had been filed with various states' pharmacy boards in the past.
There can be no assurances made that other states will not
attempt to take similar actions against the Company in the
future.
Employment Agreements
On March 16, 2001, the Company entered into an employment
agreement with its Chief Executive Officer ("CEO"), Menderes
Akdag ("Mr. Akdag"). Under the terms of this three-year
agreement the Company paid the CEO an annual salary of $150,000
for the first six months of the agreement, and thereafter his
annual salary was 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 vested at the rate of 187,500
options on each of March 16, 2001, 2002, 2003 and 2004.
On March 16, 2004, the Company amended the CEO's existing
employment agreement. The amendments are as follows: the term of
the agreement will be for three years, commencing on March 16,
2004; Mr. Akdag's salary will be increased to $250,000 per year
throughout the term of the agreement, and Mr. Akdag shall be
granted 250,000 incentive stock options under the Company's 1998
Stock Option Plan at an exercise price of $10.64 per share, which
vest at the rate of 83,333 options on each of March 16, 2005 and
2006, and 83,334 options on March 16, 2007.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Commitments and Contingencies (Continued)
On May 1, 2000, the Company entered into a two-year employment
agreement with Marc Puleo, M.D., current President, 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 the Company's Board of Directors. Dr.
Puleo's salary was increased to $100,000 in fiscal year 2002, and
then increased to $150,000 in May 2003. The agreement can be
terminated upon the mutual consent of the parties or upon 90 days
notice by the Company, in which case the Company would continue
to compensate him under the terms of his employment agreement, or
his contract will renew annually.
Operating Lease
The Company is responsible for certain maintenance costs, taxes
and insurance under this lease. Starting June 1, 2005 the
Company will exercise their option to lease an additional 3,000
square feet, which will increase the future minimum annual lease
payments. On May 18, 2005 the Company extended for an additional
three years, its lease agreement which was due to expire on May
31, 2006. The new amendment will expire on May 31, 2009. The
future minimum annual lease payments are as follows:
Years Ending March 31,
----------------------
2006 $ 429,000
2007 452,000
2008 470,000
2009 489,000
2010 82,000
-------------
Total lease payments $ 1,922,000
=============
Rent expense was $383,000, $330,000 and $253,000 for the years
ended March 31, 2005, 2004 and 2003, respectively.
(12) Sales by Category
The following table provides a breakdown of the percentage of our
total sales by each category during the indicated periods:
Year Ended March 31,
2005 2004 2003
------ ------ ------
Prescription medications 30% 30% 29%
Non-prescription medications 69% 69% 64%
Shipping and handling charges and other 1% 1% 7%
------ ------ ------
Total 100% 100% 100%
====== ====== ======
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data for fiscal 2005 and
2004 is as follows:
Quarter Ended: June 30, 2004 September 30, 2004 December 31, 2004 March 31, 2005
- -------------- --------------------------------------------------------------------
Sales $ 35,288,528 $ 28,754,697 $ 20,782,837 $ 23,531,685
Income from operations $ 2,726,016 $ 2,856,588 $ 3,129,631 $ 3,789,391
Net income $ 1,818,138 $ 1,811,655 $ 1,957,111 $ 2,423,466
Diluted net income per share $ 0.08 $ 0.08 $ 0.08 $ 0.10
Quarter Ended: June 30, 2003 September 30, 2003 December 31, 2003 March 31, 2004
- -------------- --------------------------------------------------------------------
Sales $ 30,387,563 $ 24,969,228 $ 17,169,571 $ 21,467,871
Income from operations $ 2,147,288 $ 2,929,004 $ 1,976,108 $ 2,158,994
Net income $ 1,432,584 $ 1,818,188 $ 1,223,924 $ 1,338,908
Diluted net income per share $ 0.06 $ 0.08 $ 0.05 $ 0.06
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management, including our Chief Executive Officer and
Chief Financial Officer, has conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls
and procedures (as defined in Rule 13a-14(c) promulgated under the
Securities Exchange Act of 1934, as amended) as of the year ended
March 31, 2005, the end of the period covered by this report (the
"Evaluation Date"). Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective for timely gathering, analyzing
and disclosing the information we are required to disclose in our
reports filed under the Securities Exchange Act of 1934, as amended.
There have been no significant changes made in our internal controls
or in other factors that could significantly affect our internal
controls over financial reporting during the period covered by this
report.
ITEM 9B. OTHER INFORMATION
Not applicable.
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be set forth in our Proxy
Statement relating to our 2005 Annual Meeting of Stockholders to be
held on August 5, 2005, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in our Proxy
Statement relating to our 2005 Annual Meeting of Stockholders to be
held on August 5, 2005, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this item (other than information
required by Item 201(d) of Regulation S-K with respect to equity
compensation plans, which is set forth below in this Annual Report on
Form 10-K) will be set forth in our Proxy Statement relating to our
2005 Annual Meeting of Stockholders to be held on August 5, 2005, and
is incorporated herein by reference.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance
under equity compensation plans, including individual compensation
arrangements, by us under our 1998 Stock Option Plan and any
compensation plans not previously approved by our Board of Directors
as of March 31, 2005:
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
to be issued upon Weighted average
exercise of outstanding exercise price of Number of securities
options, warrants outstanding options, remaining available
Plan category and rights warrants and rights for future issuance
-------------------------------------------------------------------------------------------------------
(a) (b) (c)
1998 Stock Option Plan 1,146,002 $5.16 3,853,998
Equity compensation plans not
approved by security holders (1) 20,000 $1.33 -
--------- ---------
Total 1,166,002 3,853,998
========= =========
(1) Represents non-plan options to purchase an aggregate of 20,000 shares
of our common stock issued to a member of our management.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be set forth in our Proxy
Statement relating to our 2005 Annual Meeting of Stockholders to be
held on August 5, 2005, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be set forth in our Proxy
Statement relating to our 2005 Annual Meeting of Stockholders to be
held on August 5, 2005, and is incorporated herein by reference.
41
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report on Form 10-K.
(1) Consolidated Financial Statements
The following exhibits are filed as part of this report on Form 10-K.
(3) Articles of Incorporation and By-Laws
3.1 Amended and Restated Articles of Incorporation (1)
3.2 By-Laws of the Corporation (1)
(4) Instruments Defining the Rights of Security Holders
4.1 Form of Warrant issued to Noble International Investments,
Inc. (1)
4.2 Specimen common stock certificate (1)
(10) Material Contracts (*Management contract or compensatory plan
or arrangement.)
10.1 Second Amended and Restated Employment Agreement with
Marc A. Puleo (incorporated by reference to Exhibit 10.1 of
the Registrant's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 2000, Commission File No. 000-28827).*
10.2 1998 Stock Option Plan (1)*
10.3 Line of Credit Agreement with SouthTrust Bank, N.A. (1)
10.4 Employment Agreement with Menderes Akdag (incorporated by
reference to Exhibit 10 of the Registrant's Form 8-K on
March 16, 2001, Commission File No. 000-28827).*
10.5 Agreement for the Sale and Leaseback of the Land and Building
(incorporated by reference to Exhibit 99.1 of the Registrant's
Form 8-K on June 14, 2001, Commission File No. 000-28827).
10.6 Line of Credit Renewal Agreement with SouthTrust Bank, N.A. (1).
10.7 Loan Agreement with SouthTrust Bank, N.A. (1).
10.8 Second Line of Credit ($1,000,000) Agreement with SouthTrust Bank,
N.A. (1).
10.9 Third Line of Credit ($2,000,000) Agreement with SouthTrust Bank,
N.A. (1).
10.10 Amendment to Third Line of Credit ($5,000,000) Agreement with
SouthTrust Bank, N.A. (incorporated by reference to Exhibit 10.10
of the Registrant's Form 10-Q on November 7, 2003, Commission
File No. 000-28827).
10.11 Amendment Number 1 to Executive Employment Agreement with
Menderes Akdag (incorporated by reference to Exhibit 99.1 of
the Registrant's Form 8-K on March 16, 2004, Commission File
No. 000-28827).*
10.12 Line of Credit ($6,000,000) Agreement with RBC Centura Bank.
(incorporated by reference to Exhibit 10.12 of the Registrant's
Form 10-Q on November 5, 2005, Commission File No. 000-28827).
(14) Corporate Code of Ethics
14.1 Corporate Code of Ethics (incorporated by reference in our
definitive Proxy Statement for our 2004 Annual Meeting of
Stockholders held on August 6, 2004).
42
(21) Subsidiaries of Registrant
21.1 Subsidiaries of Registrant (filed herewith).
(31) Certifications
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, promulgated
under the Securities Exchange Act of 1934, as amended (filed
herewith to Exhibit 31.1 of the Registrant's Report on Form 10-
K for the year ended March 31, 2005, Commission File No. 000-
28827).
31.2 Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, promulgated
under the Securities Exchange Act of 1934, as amended (filed
herewith to Exhibit 31.2 of the Registrant's Report on Form 10-
K for the year ended March 31, 2005, Commission File No. 000-
28827).
(32) Certifications
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith to Exhibit 32.1 of the Registrant's Report on
Form 10-K for the year ended March 31, 2005, Commission File
No. 000-28827).
(1) Incorporated by reference to the Registration Statement on Form
10-SB, File No. 000-28827, as amended, as filed with the
Securities and Exchange Commission.
43
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: June 3, 2005
PETMED EXPRESS, INC.
(the "Registrant")
By: /s/ Menderes Akdag
-------------------------
Menderes Akdag
Chief Executive Officer
(principal executive officer)
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on June 3, 2005.
SIGNATURE TITLE
/s/ Menderes Akdag Chief Executive Officer
- -------------------- (principal executive officer)
Menderes Akdag Officer and Director
/s/ Marc Puleo, M.D. Chairman of the Board and President
- --------------------
Marc Puleo, M.D. Officer and Director
/s/ Bruce S. Rosenbloom Chief Financial Officer and Treasurer
- ------------------------ (principal financial and accounting officer)
Bruce S. Rosenbloom Officer
/s/ Robert C. Schweitzer
- ------------------------ Director
Robert C. Schweitzer
/s/ Ronald J. Korn Director
- ----------------------
Ronald J. Korn
/s/ Gian Fulgoni Director
- ----------------------
Gian Fulgoni
/s/ Frank J. Formica Director
- ----------------------
Frank J. Formica
44