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EX-31.2 - EXHIBIT 31.2 - DOVER SADDLERY INC | c24653exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - DOVER SADDLERY INC | c24653exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - DOVER SADDLERY INC | c24653exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Quarter Ended September 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 000-51624
Dover Saddlery, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE | 04-3438294 | |
(State of other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
525 Great Road, Littleton, MA 01460
(Address of principal executive offices)
(Address of principal executive offices)
(978) 952-8062 (Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
YES o NO þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company, in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes o No þ
Shares outstanding of the registrants common stock (par value $0.0001) on
October 31, 2011: 5,291,521
DOVER SADDLERY, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2011
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements. |
DOVER SADDLERY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
(In thousands, except share and per share data)
(unaudited)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 151 | $ | 745 | ||||
Accounts receivable |
550 | 533 | ||||||
Inventory |
19,371 | 15,869 | ||||||
Prepaid catalog costs |
1,387 | 930 | ||||||
Prepaid expenses and other current assets |
1,103 | 901 | ||||||
Deferred income taxes |
110 | 105 | ||||||
Total current assets |
22,672 | 19,083 | ||||||
Net property and equipment |
3,160 | 3,025 | ||||||
Other assets: |
||||||||
Deferred income taxes |
1,037 | 848 | ||||||
Intangibles and other assets, net |
572 | 593 | ||||||
Total other assets |
1,609 | 1,441 | ||||||
Total assets |
$ | 27,441 | $ | 23,549 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current portion of capital lease obligation and outstanding checks |
$ | 473 | $ | 97 | ||||
Accounts payable |
2,416 | 2,073 | ||||||
Accrued expenses and other current liabilities |
4,509 | 5,425 | ||||||
Income taxes payable |
| 414 | ||||||
Total current liabilities |
7,398 | 8,009 | ||||||
Long-term liabilities: |
||||||||
Revolving line of credit |
2,935 | | ||||||
Term Notes |
5,500 | | ||||||
Subordinated notes payable, net |
| 5,293 | ||||||
Capital lease obligation, net of current portion |
30 | 89 | ||||||
Interest rate swap derivative |
319 | | ||||||
Total long-term liabilities |
8,784 | 5,382 | ||||||
Stockholders equity: |
||||||||
Common Stock, par value $0.0001 per share; 15,000,000 shares
authorized; 5,291,521 and 5,277,161 issued and outstanding as of
September 30, 2011 and December 31, 2010, respectively |
1 | 1 | ||||||
Additional paid in capital |
45,596 | 45,391 | ||||||
Treasury stock, 795,865 shares at cost |
(6,082 | ) | (6,082 | ) | ||||
Other comprehensive loss |
(188 | ) | | |||||
Accumulated deficit |
(28,068 | ) | (29,152 | ) | ||||
Total stockholders equity |
11,259 | 10,158 | ||||||
Total liabilities and stockholders equity |
$ | 27,441 | $ | 23,549 | ||||
See accompanying notes.
3
Table of Contents
DOVER SADDLERY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands, except share and per share data)
(In thousands, except share and per share data)
(unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||||||
Revenues, net |
$ | 19,505 | $ | 18,614 | $ | 57,038 | $ | 54,695 | |||||||||||
Cost of revenues |
12,056 | 11,525 | 35,540 | 34,308 | |||||||||||||||
Gross profit |
7,449 | 7,089 | 21,498 | 20,387 | |||||||||||||||
Selling, general and administrative expenses |
6,780 | 6,218 | 19,008 | 18,274 | |||||||||||||||
Income from operations |
669 | 871 | 2,490 | 2,113 | |||||||||||||||
Interest expense, financing and other related costs, net |
124 | 255 | 626 | 766 | |||||||||||||||
Other investment (income) loss, net |
12 | 37 | (30 | ) | (384 | ) | |||||||||||||
Income before income tax provision |
533 | 579 | 1,894 | 1,731 | |||||||||||||||
Provision for income taxes |
201 | 259 | 810 | 734 | |||||||||||||||
Net income |
$ | 332 | $ | 320 | $ | 1,084 | $ | 997 | |||||||||||
Net income per share |
|||||||||||||||||||
Basic |
$ | 0.06 | $ | 0.06 | $ | 0.20 | $ | 0.19 | |||||||||||
Diluted |
$ | 0.06 | $ | 0.06 | $ | 0.20 | $ | 0.18 | |||||||||||
Number of shares used in per share calculation |
|||||||||||||||||||
Basic |
5,289,000 | 5,277,000 | 5,288,000 | 5,270,000 | |||||||||||||||
Diluted |
5,477,000 | 5,386,000 | 5,485,000 | 5,413,000 |
See accompanying notes.
4
Table of Contents
DOVER SADDLERY, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(In thousands)
(In thousands)
(unaudited)
Nine Months Ended | ||||||||
September 30, | September 30, | |||||||
2011 | 2010 | |||||||
Operating activities: |
||||||||
Net income |
$ | 1,084 | $ | 997 | ||||
Adjustments to reconcile net income to net cash used in operating activities |
||||||||
Depreciation and amortization |
559 | 550 | ||||||
Deferred income taxes |
(63 | ) | (124 | ) | ||||
Income from investment in affiliates, net |
(4 | ) | (382 | ) | ||||
Stock-based compensation |
186 | 136 | ||||||
Non-cash interest expense |
216 | 205 | ||||||
Payment of deferred interest |
(423 | ) | | |||||
Changes in current assets and liabilities: |
||||||||
Accounts receivable |
(17 | ) | 203 | |||||
Inventory |
(3,502 | ) | (858 | ) | ||||
Prepaid catalog costs and other current assets |
(659 | ) | (392 | ) | ||||
Accounts payable |
343 | (644 | ) | |||||
Accrued expenses, other current liabilities and income taxes payable |
(1,330 | ) | (433 | ) | ||||
Net cash used in operating activities |
(3,610 | ) | (742 | ) | ||||
Investing activities: |
||||||||
Distributions from investment in affiliate |
| 330 | ||||||
Purchases of property and equipment |
(689 | ) | (271 | ) | ||||
Investment in affiliates |
| (60 | ) | |||||
Change in other assets |
(12 | ) | 50 | |||||
Net cash (used in) provided by investing activities |
(701 | ) | 49 | |||||
Financing activities: |
||||||||
Borrowings under revolving line of credit, net |
2,935 | 261 | ||||||
Repayment of subordinated notes |
(5,000 | ) | | |||||
Borrowing under term note |
5,500 | | ||||||
Change in outstanding checks |
380 | 459 | ||||||
Payment of financing costs |
| 12 | ||||||
Payments on capital leases |
(63 | ) | (90 | ) | ||||
Payment of debt commitment fees |
(54 | ) | | |||||
Proceeds from exercise of stock options |
19 220 | 19 | ||||||
Net cash provided by financing activities |
3,717 | 637 | ||||||
Net decrease in cash and cash equivalents |
(594 | ) | (56 | ) | ||||
Cash and cash equivalents at beginning of period |
745 | 732 | ||||||
Cash and cash equivalents at end of period |
$ | 151 | $ | 676 | ||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 833 | $ | 562 | ||||
Income taxes |
$ | 1,431 | $ | 1,182 | ||||
Supplemental disclosure of non-cash financing activities |
||||||||
Equipment acquired under capital leases |
$ | 5 | $ | 85 | ||||
Change in fair value of interest rate swap |
$ | 319 | $ | | ||||
See accompanying notes.
5
Table of Contents
DOVER SADDLERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(unaudited)
A. Nature of Business and Basis of Preparation
Dover Saddlery, Inc., a Delaware corporation (the Company), is a leading specialty retailer
and the largest multi-channel marketer of equestrian products in the United States. The Company
sells its products through a multi-channel strategy, including direct and retail, with stores
located in Massachusetts, New Hampshire, Delaware, Texas, Maryland, Virginia, New Jersey, Georgia,
Colorado and Rhode Island. The Company provides a complete line of equestrian products, as well as
speciallydeveloped, private label offerings from its direct marketing headquarters, warehouse,
and call center facility in Littleton, Massachusetts.
Revenues are recognized when payment is reasonably assured, the product is shipped and title
and risk of loss have transferred to the customer. For direct merchandise sales, this occurs when
product is delivered to the common carrier at the Companys warehouse. For retail sales, this
occurs at the point of sale.
The Companys quarterly product sales have ranged from a low of approximately 20% to a high of
approximately 32% of any calendar years results. The beginning of the spring outdoor riding season
in the northern half of the country has typically generated a slightly stronger second quarter of
the year, and the holiday buying season has generated additional demand for our equestrian product
line in the fourth quarter of the year. Revenues for the first and third quarters of the calendar
year have tended to be somewhat lower than the second and fourth quarters. The Company anticipates
that its revenues will continue to vary somewhat by season.
The Company offers a comprehensive selection of products required to own, train and ride a
horse, selling from under $1.00 to over $7,000 per product. The Companys equestrian product line
includes a broad variety of separate items, such as saddles, tack, specialized apparel, footwear,
horse clothing, horse health and stable products. Separate reporting of the revenues of these
numerous items is not practical.
The Company views its operations and manages its business as one operating segment utilizing a
multi-channel distribution strategy. Market channel revenues are as follows (dollars in
thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues, net direct |
$ | 11,321 | $ | 11,654 | $ | 35,561 | $ | 36,257 | ||||||||
Revenues, net retail stores |
8,184 | 6,960 | 21,477 | 18,438 | ||||||||||||
Revenues, net total |
$ | 19,505 | $ | 18,614 | $ | 57,038 | $ | 54,695 | ||||||||
The accompanying condensed consolidated financial statements comprise those of the Company,
its wholly-owned subsidiaries, and its investment in affiliates. All inter-company accounts and
transactions have been eliminated in consolidation. The accompanying condensed consolidated
financial statements as of September 30, 2011 and for the three and nine months ended September 30,
2011 and 2010 are unaudited. In managements opinion, these unaudited condensed consolidated
financial statements have been prepared on the same basis as the audited consolidated financial
statements for the year ended December 31, 2010 and include all adjustments, consisting of only
usual recurring adjustments, necessary for a fair presentation of the results for such interim
periods. The results of operations for the three and nine months ended September 30, 2011 are not
necessarily indicative of the results expected for the full year ended December 31, 2011.
Certain footnote disclosures normally included in financial statements prepared in accordance
with U.S. generally accepted accounting principles have been condensed or omitted pursuant to
pertinent rules and regulations, although the Company believes that the disclosures in these
financial statements are adequate to make the information presented not misleading. The
accompanying unaudited condensed consolidated financial statements should be read in conjunction
with the audited December 31, 2010 consolidated financial statements, which are included in our
Annual Report on Form 10-K, filed on March 31, 2011.
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Table of Contents
B. Accounting for Stock-Based Compensation
The Company recognizes, as stock-based compensation, the fair value of stock-based awards on a
straight-line basis over the vesting period of the awards which approximates the requisite service
periods. Stock-based compensation for the three months ended September 30, 2011 and 2010 was
$62,000 and $45,000, respectively. For the nine months ended September 30, 2011 and 2010,
stock-based compensation was $186,000 and $136,000, respectively.
There was no activity related to stock option grants, exercises or forfeitures for the nine
months ended September 30, 2011, except for the exercise of 3,494 shares resulting in proceeds of
$4,333 in the third quarter and 10,866 shares resulting in proceeds of $15,527 in the first quarter
of 2011.
The amount of stock-based compensation expense that may be recognized for
outstanding, unvested options as of September 30, 2011 was approximately $432,000, to be recognized
on a straight-line basis over the remaining weighted average vesting term of 2.9 years. As of
September 30, 2011, the intrinsic value of all in the money outstanding options was approximately
$459,000.
C. Inventory
Inventory consists of finished goods in the Companys mail-order warehouse and retail stores.
The Companys inventories are stated at the lower of cost, with cost determined by the first-in,
first-out method, or net realizable value. The Company maintains a reserve for excess and obsolete
inventory. This reserve was $95,000 as of September 30, 2011 and December 31, 2010. The Company
continuously monitors the salability of its inventories to ensure adequate valuation of the related
merchandise.
D. Advertising
The Company recognizes deferred costs over the period of expected future revenue, which is
typically less than one year. Deferred costs as of September 30, 2011 and December 31, 2010 were
$1,387,000 and $930,000 respectively. The combined marketing and advertising costs charged to
selling, general, and administrative expenses for the three months ended September 30, 2011 and
2010 were $1,997,000 and $1,712,000, respectively. For the nine months ended September 30, 2011
and 2010, combined marketing and advertising costs charged to selling, general, and administrative
expenses were $5,675,000 and $5,338,000, respectively.
E. Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in net assets of a business enterprise
during a period from transactions generated from non-owner sources. Comprehensive income (loss)
includes all changes in equity during a period except those resulting from investments by owners
and distributions to owners. The Companys only item of other comprehensive income (loss), other
than reported net income, was the change in fair value of an interest rates swap. The other
comprehensive loss, net of taxes, for the three and nine months ended September 30, 2011 was
$85,000 and $188,000, respectively; there was no other comprehensive loss to be recorded during the
same period in 2010.
The following table reconciles net income to comprehensive income (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 332 | $ | 320 | $ | 1,084 | $ | 997 | ||||||||
Other comprehensive loss, net of taxes |
(85 | ) | | (188 | ) | | ||||||||||
Total comprehensive income |
$ | 247 | $ | 320 | $ | 896 | $ | 997 | ||||||||
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Table of Contents
F. Net Income Per Share
A reconciliation of the number of shares used in the calculation of basic and diluted net
income per share is as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic weighted average common shares outstanding |
5,289 | 5,277 | 5,288 | 5,270 | ||||||||||||
Add: Dilutive effect of assumed stock option
and warrant exercises less potential incremental
shares purchased under the treasury method |
188 | 109 | 197 | 143 | ||||||||||||
Diluted weighted average common shares outstanding |
5,477 | 5,386 | 5,485 | 5,413 |
For the three and nine months ended September 30, 2011 and 2010, approximately 422,000
options and 454,000 options, respectively, to acquire common stock were excluded from the diluted
weighted average shares calculation as the effect of such options is anti-dilutive.
G. Financing Agreements
Revolving Credit Facility
On March 28, 2011, the Company and its bank, RBS Citizens, N.A., amended the revolving line of
credit agreement in connection with the refinancing of the $5,000,000 senior subordinated notes.
Under the amended revolving line of credit, the Company can borrow up to $13,000,000, of which up
to $1,000,000 can be in the form of letters of credit, and increase this amount up to $20,000,000
at the discretion of the bank. Any outstanding balances borrowed under the credit facility are due
April 30, 2013. The credit facility bears interest at the base rate, announced from time to time
by the bank, plus an applicable margin determined by the Companys funded debt ratio. As of
September 30, 2011, the LIBOR rate (base rate) was 0.23%, plus the applicable margin of 2.20%.
Interest is payable monthly. At its option, the Company may have all or a portion of the unpaid
principal under the credit facility bear interest at a base rate using either LIBOR or the prime
rate.
The Company is obligated to pay commitment fees of 0.20% per annum on the average daily,
unused amount of the line of credit during the preceding quarter. All assets of the Company
collateralize the senior revolving credit facility. Under the terms of the credit facility, the
Company is subject to certain covenants including, among others, maximum funded debt ratios,
maximum debt to tangible net worth ratios, minimum fixed charge ratios, current asset ratios, and
maximum capital expenditures. At September 30, 2011, the Company was in compliance with all of the
covenants under the revolving line of credit facility.
At September 30, 2011, the Company had the ability to borrow $13,000,000 on the revolving line
of credit, subject to certain covenants, of which there was $2,935,000 outstanding, bearing
interest at the net revolver rate of 2.43%. At December 31, 2010, the Company had no balance
outstanding.
Term Notes, Senior Subordinated Notes Payable and Warrants
On March 28, 2011, the Company borrowed $5,500,000 in the form of a 7-year term note from the
bank to refinance the $5,000,000 senior subordinated notes and deferred interest on those notes.
The initial floating rate interest on the term note was 5.4% consisting of a 1.0% LIBOR floor plus
a 4.4% margin. On April 1, 2011 the company entered into an interest rate swap for the term note
to fix the interest rate at 7.4% on $3,900,000 of the principal. The remaining $1,600,000 of the
principal earns a floating rate based on a base rate, with a minimum of 1.0% as announced from time
to time by the bank, plus a 4.4% margin. As of September 30, 2011, the LIBOR rate (base rate) was
0.23%. The combined interest rate of 1.0% and 4.4% resulted in a total interest rate of 5.4% at
September 30, 2011. Interest is payable monthly. The Company is obligated to repay $786,000 of
principal annually commencing in April 2013 and extending to March 2018. The Company is further
obligated to accelerate repayment of up to $1,600,000 in principal in the event it has excess cash
flow determined by a cash flow recapture formula. All assets of the Company collateralize the term
note facility. Under the terms of the term note facility, the Company is subject to certain
covenants including, among others,
maximum funded debt ratios, maximum debt to tangible net worth ratios, minimum fixed charge
ratios, current asset ratios, and maximum capital expenditures. At September 30, 2011 the Company
was in compliance with all of the covenants under the term note facility.
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Table of Contents
In connection with the issuance of the retired subordinated notes, the Company issued warrants
to the note holders, exercisable at any time after December 11, 2007 for an initial 118,170 shares
of its common stock, which warrants have an exercise price of $2.75 per share. The number of
shares to be received for the warrants, upon exercise, is subject to change in the event of
additional equity issuances and/or stock splits. The warrants were estimated to have a fair value
of $272,000, which was reflected as a discount of the notes proceeds. The discount was amortized
through interest expense while the notes were outstanding and the unamortized discount was fully
expensed at refinancing. The warrants issued in connection with the subordinated notes are still
outstanding and terminate on December 10, 2016.
As of September 30, 2011, the $5,500,000 of term notes on the condensed consolidated balance
sheet, reflect the $5,500,000 face value. As of December 31, 2010, the net $5,293,477 subordinated
notes, on the condensed consolidated balance sheet, reflect the $5,000,000 face value, plus
$397,947 in deferred interest less the remaining unamortized net discount of $104,470.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months
or less at the time of purchase to be cash equivalents. Outstanding checks, net of cash balances in
a single bank, are included in current portion of capital lease obligation and outstanding checks
in current liabilities.
Financial Instruments
The Companys financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable, line of credit advances, capital leases and notes payable. The carrying value of
cash and cash equivalents, accounts receivable, and accounts payable reflects fair value due to
their short-term nature. The carrying value of the line of credit reflects fair value due to
variable interest rates. The carrying value of the term note approximates the fair value, as of
September 30, 2011.
H. Investment in Affiliates
On April 11, 2008, the Company acquired a significant non-controlling interest in Hobby
Horse Clothing Company, Inc. (HH), in exchange for 81,720 shares of unregistered Dover common
stock. The Company accounts for this investment using the equity method.
The Company acquired 40% of the common stock of HH, a privately-owned company. The total
acquisition costs included $380,000 in common stock, as well as $33,300 in professional fees. Based
on the purchase allocation, the total acquisition cost of $413,300 was allocated to the fair value
of the Companys share of net assets acquired, including approximately $138,000 of intangible
assets, which represents the difference between the costs and underlying equity in HHs net assets
at the date of acquisition.
The Companys equity share of HHs net income, including the intangible asset customer list
amortization (resulting from the purchase price allocation) is reflected as other investment
(income) in the accompanying consolidated statements of income. The Company recorded net loss of
$(11,000) for the three months ending September 30, 2011 compared to a net loss recorded of
$(24,000) for the same period in 2010. The Company recorded net income of $13,000 for the nine
months ending September 30, 2011 compared to net income recorded of $396,000 for the same period in
2010. The resulting carrying value at September 30, 2011 is $290,000 and is included in
intangibles and other assets, net, in the accompanying condensed consolidated balance sheets. The
carrying value at December 31, 2010 was $277,000 and was included in intangibles and other assets,
net, in the accompanying condensed consolidated balance sheets.
In May 2010, the Company launched a joint venture to provide equine pharmaceuticals to the
equine marketplace. The venture, HorsePharm.com, LLC (HP), was established as a limited
liability company, and Dover has a non-controlling interest of 50%. The Company accounts for this
investment using the equity method. Thus, during the second quarter of 2010, Dover recorded its
portion of the initial investment in HP of $60,000. For the three months ending September 30,
2011 the Company recorded a net loss of $(1,000) for its share of the joint ventures operating
results compared to a net loss recorded of $(13,000) for the same period in 2010. The Company
recorded a net loss of $(9,000) for the nine months ending September 30, 2011 compared to a net
loss recorded of $(13,000) for the same period in 2010. The carrying value at September 30, 2011,
was $31,000, which is included in intangibles and other assets, net, in the accompanying condensed
consolidated balance sheets. The carrying value at December 31, 2010, was $40,000, which is
included in intangibles and other assets, net, in the accompanying condensed consolidated balance
sheets. The
operating agreement governing HP contains a buy/sell feature that can be exercised for a price
established by the HP member who initiates the buy/sell feature. The HP member that receives the
offer can elect to buy the other members interest or sell its interest at the offered price.
9
Table of Contents
I. Income Taxes
At September 30, 2011, the Company maintains a liability of $33,000, for unrecognized tax
benefits. Although the Company believes it has adequately reserved for our uncertain tax positions,
no assurance can be given that the final tax outcome of these matters will not be different. The
Company adjusts these reserves in light of changing facts and circumstances, such as the closing of
a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences will impact the provision for
income taxes in the period in which such determination is made. The provision for income taxes
includes the impact of reserve provisions and changes to reserves that are considered appropriate,
as well as the related net interest. During the nine months ended September, 2011 and 2010, the
Company recognized nominal interest and penalty expenses.
Tax years 2006 through 2010 remain subject to examination by the IRS; 2007 through 2010 tax
years remain subject to examination by Massachusetts; and 2006 through 2010 tax years remain
subject to examination by various other jurisdictions.
J. Related Party Transactions
On October 26, 2007, the disinterested members of the Audit Committee of the Board of
Directors approved a $5,000,000 subordinated debt financing facility in the form of senior
subordinated notes as part of a plan to refinance the Companys former subordinated debt with
Patriot Capital. The new sub-debt facility was led by BCA Mezzanine Fund, L.P., which participated
at $2,000,000 (in which Company Board member Gregory Mulligan holds a management position and
indirect economic interest). The subordinated notes were consummated as of December 11, 2007.
Except as noted above with respect to Mr. Mulligan, there is no relationship, arrangement or
understanding between the Company and any of the subordinated holders or any of their affiliates,
other than in respect of the loan agreement establishing and setting forth the terms and conditions
of the subordinated notes. For the nine months ended September 30, 2011, the Company recognized
$175,000 in interest expense for the subordinated notes payable and for the three and nine months
ended September 30, 2010, the Company recognized $175,000 and $525,000, respectively, in interest
expense for the subordinated notes payable, which was paid on March 28, 2011.
On March 28, 2011, the Company repaid these subordinated notes and $423,000 of deferred
interest from the proceeds of $5,500,000 in term notes. The warrants issued in connection with the
subordinated notes are still outstanding and terminate on December 10, 2016.
In October of 2004, the Company entered into a lease agreement with a minority stockholder.
The agreement, which relates to the Plaistow, NH retail store, is a five-year lease with options to
extend for an additional fifteen years. During the three months ended September 30, 2011 and 2010,
the Company expensed in connection with this lease $52,000 and $46,000, respectively. During the
nine months ended September 30, 2011 and 2010, the Company expensed in connection with this lease
$157,000 and $138,000, respectively. In addition, a related deposit of $18,750 is recorded as
prepaid expenses and other current assets, as of September 30, 2011 and December 31, 2010.
In order to expedite the efficient build-out of leasehold improvements in its new retail
stores, the Company utilizes the services of a real estate development company owned by a
non-executive Company employee and minority stockholder to source construction services and retail
fixtures. Total payments made to the real estate development company for the three months ended
September 30, 2011 and 2010, consisting primarily of reimbursements for materials and outside labor
for the fit-up of stores, were $85,000 and $9,000, respectively. For the nine months ended
September 30, 2011 and 2010, reimbursements for materials and outside labor for the fit-up of
stores, were $196,000 and $87,000, respectively.
K. Commitments and Contingencies
Lease Commitments
The Company leases its facilities and certain fixed assets that may be purchased for a nominal
amount on the expiration of the leases under non-cancelable operating and capital leases that
extend through 2019. These leases, which may be renewed for periods ranging from one to five years,
include fixed rental agreements as well as agreements with rent escalation clauses.
In connection with retail locations, the Company enters into various operating lease
agreements, with escalating rental payments. The effects of variable rent disbursements have been
expensed on a straight-line basis over the life of the lease. As of September 30, 2011 and December
31, 2010, there was approximately $563,000 and $479,000, respectively, of deferred rent recorded in
accrued expenses and other current liabilities.
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Contingencies
From time to time, the Company is exposed to litigation relating to our products and
operations. The Company is not currently engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material, adverse affect on our financial condition or
results of operations.
L. Interest Rate Swap
The Company uses interest rate swap contracts as cash flow hedges to eliminate the cash flows
exposure of interest rate movements on variable rate debt. The Company accounts for its interest
rate swap contracts in accordance with FASB ASC 815, Derivatives and Hedging. FASB ASC 815
requires all derivatives, including interest rate swaps, to be recorded on the balance sheet at
fair value. The increase or decrease in the fair value of the hedge is initially included as a
component of other comprehensive income and is subsequently reclassified into earnings and recorded
as interest expense, when interest on the related debt is paid. The Company values the interest
rate swap contracts in accordance with FASB ASC 820, Fair Value Measurement and Disclosures. The
Company documents its risk management strategy and hedge effectiveness at the inception of and
during the term of each hedge. The Companys interest rate risk management strategy is to
stabilize cash flow requirements by maintaining interest rate swap contracts to convert variable
rate debt to fixed rate debt.
The Company is exposed to interest rate risk primarily through its borrowing activities. The
Companys term note is a variable rate instrument. The Company entered into an interest rate swap
contract under which the Company agreed to pay an amount equal to a specified fixed rate of
interest on a notional principal amount, and to receive in turn an amount equal to a specified
variable rate of interest on the same notional principal amount.
On April 1, 2011 the Company entered into a 7-year interest rate swap contract on the notional
value of $3,900,000 of the term note which requires payment of a fixed rate of interest (7.4%) and
the receipt of a variable rate of interest, based on the one month LIBOR rate, on the $3,900,000.
The Company designated this interest rate swap contract as an effective cash flow hedge. The
Company adjusts the interest rate swap to fair value with the change accounted for through other
comprehensive income, as the contracts are considered effective in offsetting the interest rate
exposure of the forecasted interest rate payments hedged. The Company anticipates that this
contract will continue to be effective. The fair value of the interest rate swap was a liability
of $319,494 as of September 30, 2011.
The Company does not hold any derivative instruments that are not designated as a hedging
instrument. As of September 30, 2011 the following table presents information about the fair value
of the Companys derivative instruments that have been designated as hedging instruments:
Liability Derivatives as of: | ||||||||||||
September 30, 2011 | September 30, 2010 | |||||||||||
Balance Sheet | Balance Sheet | |||||||||||
Location | Fair Value | Location | Fair Value | |||||||||
Interest rate swap contract |
Interest rate swap derivative | $ | 319,494 | Interest rate swap derivative | |
The following table presents information about the effects of the Companys derivative
instruments:
Amount of Loss Recognized Net of Tax, | ||||||||||
Location of Loss | in Other Comprehensive Loss for the | |||||||||
Recognized on | nine months ended September 30 | |||||||||
Derivative | 2011 | 2010 | ||||||||
Interest rate swap contact |
Other comprehensive loss | $ | 188,518 | |
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M. Fair Value
FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, and establishes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair
value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are
described below:
Level 1 | Pricing inputs are quoted prices available in active markets for identical investments as of the reporting date. The Company does not have any investments meeting the criteria of Level 1 inputs. | |||
Level 2 | Pricing inputs are quoted prices for similar investments, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. The Companys derivatives discussed above, meet the criteria of a Level 2 input. | |||
Level 3 | Pricing inputs include unobservable inputs that reflect the reporting entitys own assumptions about the assumptions market participants would use in pricing the asset or liability, which are developed based on the best information available. Level 3 includes private investments that have no market activity. The Company does not have any investments meeting the criteria of Level 3 inputs. |
The Company accounts for its interest rate swap as derivative financial instruments in
accordance with the related guidance. Under this guidance, derivatives are carried on the balance
sheet at fair value. The fair value of the Companys interest rate swap is determined based on
observable market data in combination with expected cash flows. The fair value of the Companys
interest rate swap was determined using projected future cash flows, discounted at the mid-market
implied forward LIBOR. The value at September 30, 2011 is included in long-term liabilities.
The following table presents the financial instruments carried at fair value as of September
30, 2011 in accordance with the FASB ASC 820 hierarchy noted above:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Interest Rate Swap
Derivative as of
September 30, 2011 |
| $ | (319,494 | ) | | $ | (319,494 | ) | ||||||||
N. Subsequent Events
The Company has evaluated all events or transactions through the date of this filing. During
this period, the Company did not have any material subsequent events that impacted its condensed
consolidated financial statements.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
This Quarterly Report on Form 10-Q, including the following discussion, contains
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 that involve substantial risks and uncertainties. For this purpose, any statements contained
herein that are not statements of historical fact may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, the words projected, anticipated, planned,
expected, and similar expressions are intended to identify forward-looking statements. In
particular, statements regarding future financial targets or trends are forward-looking statements.
Forward-looking statements are not guarantees of our future financial performance, and undue
reliance should not be placed on them. Our actual results, performance or achievements may differ
significantly from the results, performance or achievements discussed in or implied by the
forward-looking statements. Factors that could cause such a difference detailed in Item 1A. Risk
Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (fiscal
2010) and in our subsequent periodic reports on Form 10-Q. We disclaim any intent or obligation to
update any forward-looking statement.
Overview
The Company is a leading, specialty retailer and the largest multi-channel marketer of
equestrian products in the U.S. For over 35 years, Dover Saddlery has been a premier upscale
marketing brand in the English-style riding industry. We sell our products through a multi-channel
strategy, including direct and retail. This multi-channel strategy has allowed us to use catalogs
and our proprietary database of over two million names of equestrian enthusiasts as the primary
marketing tools to increase catalog sales and to drive additional business to our e-commerce
websites and retail stores.
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In the third quarter of 2011, the Company continued to control overhead costs but invest more
in marketing costs to generate higher sales. The Company achieved revenue growth in the fourth
quarter of 2010 and for the first, second and third quarters of 2011 especially in its retail
stores. As a result the Company opened a new store in Parker, Colorado during the second quarter
of 2011, will be opening a new store in Libertyville, IL in the fourth quarter and will also
continue to seek other new store locations that can be opened in 2012. However, our
strategy to increase the number of retail store locations is based on finding optimal locations
where demand for equestrian products is high.
Consolidated Performance and Trends
The Company reported a net income in the third quarter of 2011 of $332,000 or $0.06 per share,
compared to net income of $320,000 or $0.06 per diluted share for the corresponding period in 2010,
an improvement of 3.8%. For the nine months ended September 30, 2011 the Company reported a net
income of $1,084,000 or $0.20 per diluted share, compared to net income of $997,000 or $0.18 per
diluted share for the corresponding period in 2010, an improvement of 8.8%.
The third quarter of 2011 results reflect our continuing efforts to execute our growth
strategy in the retail market channel where revenues increased 17.6% to $8.2 million in the
quarter. This trend of increased revenue in the retail market channel may be slowed or eroded by
delays in the execution of our new store expansion strategy, constraints in available capital, and
interim declines in consumer demand at our retail stores impacted by lingering effects of the
recent global financial and credit crisis. The Company responds to fluctuations in revenues
primarily by delaying the opening of new stores, adjusting marketing efforts and operations to
support our retail stores and managing costs. The success of our new store growth plan is
dependent upon the response of our customers to these marketing strategies and evolving market
conditions. Our direct market channel revenues decreased 2.9%, to $11.3 million in the third
quarter of 2011, due to a reduced consumer spending. We respond to fluctuations in our direct
customers response by adjusting the quantities of catalogs mailed and other Internet marketing and
customer-related strategies and tactics in order to maximize revenues and manage costs.
Given continued economic uncertainty, it is very difficult to accurately predict economic
trends; however, the increase in consumer sentiment since 2008 and the Companys store sales, have
given us confidence to resume our store rollout strategy which commenced in the second quarter of
2011.
Single Reporting Segment
The Company operates and manages its business as one operating segment utilizing a
multi-channel distribution strategy.
Results of Operations
The following table sets forth our unaudited results of operations as a percentage of revenues
for the periods shown (1):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues, net |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of revenues |
61.8 | 61.9 | 62.3 | 62.7 | ||||||||||||
Gross profit |
38.2 | 38.1 | 37.7 | 37.3 | ||||||||||||
Selling, general and administrative expenses |
34.8 | 33.4 | 33.3 | 33.4 | ||||||||||||
Income from operations |
3.4 | 4.7 | 4.4 | 3.9 | ||||||||||||
Interest expense, financing and other related costs, net |
0.6 | 1.4 | 1.1 | 1.4 | ||||||||||||
Other investment (income) loss, net |
0.1 | 0.2 | 0.0 | (0.7 | ) | |||||||||||
Income before income tax provision |
2.7 | 3.1 | 3.3 | 3.2 | ||||||||||||
Provision for income taxes |
1.0 | 1.4 | 1.4 | 1.3 | ||||||||||||
Net income |
1.7 | 1.7 | 1.9 | 1.8 |
(1) | Certain of these amounts may not properly sum due to rounding. |
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The following table presents certain selected unaudited operating data (dollars in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues, net direct |
$ | 11,321 | $ | 11,654 | $ | 35,561 | $ | 36,257 | ||||||||
Revenues, net retail stores |
8,184 | 6,960 | 21,477 | 18,438 | ||||||||||||
Revenues, net total |
$ | 19,505 | $ | 18,614 | $ | 57,038 | $ | 54,695 | ||||||||
Other operating data: |
||||||||||||||||
Number of retail stores (1) |
14 | 13 | 14 | 13 | ||||||||||||
Capital expenditures |
287 | 57 | 689 | 271 | ||||||||||||
Gross profit margin |
38.2 | % | 38.1 | % | 37.7 | % | 37.3 | % | ||||||||
Adjusted EBITDA(2) |
921 | 1,094 | 3,235 | 2,799 | ||||||||||||
Adjusted EBITDA margin(2) |
4.7 | % | 5.9 | % | 5.7 | % | 5.1 | % |
(1) | Includes thirteen Dover-branded stores and one Smith Brothers store. The Parker, CO Dover-branded store opened in Q2 2011. | |
(2) | When we use the term Adjusted EBITDA, we are referring to net income minus interest income and other income plus interest expense, income taxes, non-cash stock-based compensation, depreciation, amortization and other investment income, net. We present Adjusted EBITDA because we consider it an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. |
Adjusted EBITDA has some limitations as an analytical tool and you should not consider it in
isolation or as a substitute for net income, operating income, cash flows from operating, investing
or financing activities or any other measure calculated in accordance with U.S. generally accepted
accounting principles. Some of the limitations are:
| Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or capital commitments; |
| Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| Adjusted EBITDA does not reflect the impact of an impairment charge that might be taken, when future results are not achieved as planned, in respect of goodwill resulting from any premium the Company might pay in the future in connection with potential acquisitions; |
| Adjusted EBITDA does not reflect the interest expense or cash requirements necessary to service interest or principal payments on our debt; |
| Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
| Although stock-based compensation is a non-cash charge, additional stock options might be granted in the future, which might have a future dilutive effect on earnings and EPS; and |
| Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
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The following table reconciles net income to Adjusted EBITDA (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 332 | $ | 320 | $ | 1,084 | $ | 997 | ||||||||
Depreciation |
188 | 176 | 554 | 545 | ||||||||||||
Amortization of intangible assets |
2 | 2 | 5 | 5 | ||||||||||||
Stock-based compensation |
62 | 45 | 186 | 136 | ||||||||||||
Interest expense, financing and other related costs, net |
124 | 255 | 626 | 766 | ||||||||||||
Other investment (income) loss, net |
12 | 37 | (30 | ) | (384 | ) | ||||||||||
Provision for income taxes |
201 | 259 | 810 | 734 | ||||||||||||
Adjusted EBITDA |
$ | 921 | $ | 1,094 | $ | 3,235 | $ | 2,799 | ||||||||
Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010
Revenues
Total revenues increased $0.9 million, or 4.8%, to $19.5 million for the three months ended
September 30, 2011 from $18.6 million for the three months ended September 30, 2010. During the
period, revenues in our direct market channel decreased $0.3 million, or 2.8%, to $11.3 million.
Revenues in our retail market channel increased $1.2 million, or 17.6%, from the corresponding
period in 2010 to $8.2 million. The decrease in our direct market channel was due to weakness in
consumer spending in this channel. The increase in revenues from our retail market channel was due
to strong sales growth from our newer stores as they mature, an additional retail store and
promotions. Same store sales for the three-month period increased 9.9% over the prior year.
Gross Profit
Gross profit for the three months ended September 30, 2011 increased $0.4 million, or 5.1%, to
$7.5 million as compared to the corresponding period in 2010. Gross profit, as a percentage of
revenues, for the three months ended September 30, 2011 increased 0.1% to 38.2% from 38.1% for the
corresponding period in 2010. The slight increase in gross profit as a percentage of revenues was
attributable to lower average product costs.
Selling, General and Administrative
Selling, general and administrative expenses increased $0.6 million, or 9.0% to $6.8 million
for the three months ended September 30, 2011 from $6.2 million for the three months ended
September 30, 2010. SG&A expenses, as a percentage of revenues, increased to 34.8% of revenues
from 33.4% of revenues for the corresponding period in 2010 as a result of increased costs in 2011.
SG&A increased primarily as a result of an additional $285,000 in marketing costs.
Interest Expense
Interest expense, including amortization of financing costs, attributed to our term note and
revolving credit facility decreased $131,000 or 51.3%, to $124,000 from $255,000 due to the
refinancing of our subordinated notes with a term note from our bank.
Other Investment Income
Net income (loss) from investment activities consists of the Companys share of net earnings
or loss of its affiliate as they occur. The Companys net investment loss for the three months
ending September 30, 2011 was $12,000, a decrease of $25,000 over its net investment loss of
$37,000 in 2010. The Companys investment income or loss from investment activities are related to
our investments in Hobby Horse Clothing Company, Inc. (HH) and Horsepharm, LLC.
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Income Tax Provision
The provision for income taxes was $0.2 million for the three months ended September 30, 2011,
reflecting an effective tax rate of 38%, compared to $0.3 million for the corresponding period in
2010, reflecting an effective tax rate of 45%. The effective tax rates for the quarters were based
upon managements best estimates of the estimated effective rates for each entire year.
Net Income
The net income for the third quarter of 2011 increased by $12,000, or 3.8%, to $332,000,
compared to $320,000 in the third quarter of 2010. This increase in the net income was due
primarily to increased sales in the retail channel and decreased interest expense but was offset by
increased SG&A expenses related to marketing and labor costs. The resulting quarterly income per
basic and diluted share remained flat at $0.06 in the third quarter of 2011 as compared to the same
period in 2010.
Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010
Revenues
Total revenues increased $2.3 million, or 4.3%, to $57.0 million for the nine months ended
September 30, 2011 from $54.7 million for the nine months ended September 30, 2010. Revenues in
our direct market channel decreased $0.7 million, or 1.9%, to $35.6 million from $36.3 million in
the corresponding period in 2010. Revenues in our retail market channel increased $3.0 million, or
16.4%, to $21.5 million from $18.4 million in 2010. The decrease in our direct market channel was
due to weakness in consumer spending in this channel. The increase in revenues from our retail
market channel was due to strong sales growth from our newer stores as they mature, an additional
retail store and promotions. Same store sales for the nine month period increased 12.8% over the
prior year.
Gross Profit
Gross profit for the nine months ended September 30, 2011 increased $1.1 million, or 5.5%, to
$21.5 million from $20.4 million for the corresponding period in 2010. Gross profit, as a
percentage of revenues, for the nine months ended September 30, 2011 increased 0.4% to 37.7% from
37.3% for the corresponding period in 2010. The increase in gross profit of $1.1 million was
attributable to increased revenues in the retail channel and improved product margins. The
increase in gross profit as a percentage of revenues was attributable to variations in our overall
product mix.
Selling, General and Administrative
Selling, general and administrative expenses increased $0.7 million, or 4.0%, for the nine
months ended September 30, 2011 to $19.0 million from $18.3 million for the corresponding period in
2010. Increased marketing costs of $336,000 and labor costs of $168,000 were the primary causes
for this increase in SG&A expenses. SG&A expenses, as a percentage of revenues, were reduced to
slightly to 33.3% of revenues from 33.4% of revenues for the corresponding period in 2010.
Interest Expense
Interest expense, including amortization of financing costs, attributed to our term note and
revolving credit facility decreased $164,000 or 21.5% to $600,000 for the nine months ending
September 30, 2011. In the first quarter of 2011, there was an increase of $243,000 which was
attributed to expensing unamortized, deferred financing costs and the debt discount upon the
refinancing of the senior subordinated notes on March 28, 2011. This increase has been mostly
offset by $287,000 in lower interest expense in the second and third quarters of 2011 on the new
term note as compared to the interest paid in the second and third quarters of 2010 on the retired
subordinated notes.
Other Investment Income
Net income from investment activities consists of the Companys share of net earnings or loss
of its affiliate as they occur. The Companys net investment income for the nine months ending
September 30, 2011 was $4,000, a decrease of $378,000 over its net investment income of $384,000 in
2010. The Companys investment income from investment activities are related to our
investments in Hobby Horse Clothing Company, Inc. (HH) and Horsepharm, LLC. The Companys
share of HHs net income in 2010 included the non-recurring gain of $402,000 on the proceeds from a
life insurance settlement contract on a former officer of HH.
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Income Tax Provision
The provision for income taxes was $0.8 million for the nine months ended September 30, 2011,
reflecting an effective tax rate of 44%, compared to $0.7 million for the corresponding period in
2010, reflecting an effective tax rate of 42%. The effective tax rates for the quarters were based
upon managements best estimates of the estimated effective rates for each entire year.
Net Income
The net income for the nine months ended September 30, 2011 increased $87,000 or 8.8%, to
$1,084,000 from $997,000 for the corresponding period in 2010. This increase in profitability of
$87,000 was due primarily to increased revenues and improved gross margin. The resulting income
per diluted share increased to $0.20 for the nine months ended September 30, 2011 as compared to
$0.18 for the corresponding period in 2010.
Seasonality and Quarterly Fluctuations
Since 2001, our quarterly product sales have ranged from a low of approximately 20% to a high
of approximately 32% of any calendar years results. The beginning of the spring outdoor riding
season in the northern half of the country has typically generated a slightly stronger second
quarter of the year, and the holiday buying season has generated additional demand for our normal
equestrian product lines in the fourth quarter of the year. Revenues for the first and third
quarters of the calendar year have tended to be somewhat lower than the second and fourth quarters.
We anticipate that our revenues will continue to vary somewhat by season. The timing of our new
retail store openings has had, and is expected to continue to have, a significant impact on our
quarterly results. We will incur one-time expenses related to the opening of each new store. As we
open new stores, (i) revenues may spike and then settle, and (ii) pre-opening expenses, including
occupancy and management overhead, are incurred, which may not be offset by correlating revenues
during the same financial reporting period. As a result of these factors, new retail store openings
may result in temporary declines in operating profit, both in dollars and as a percentage of sales.
Liquidity and Capital Resources
For the nine months ended September 30, 2011, our cash was reduced by $594,000. Cash was
utilized primarily for seasonal working capital requirements. The source for cash generated
related to increased balances in depreciation and amortization and increased borrowings under our
revolving credit facility. On March 28, 2011, the Company amended its line of credit facility with
the bank with the potential to increase the available credit from $13,000,000 up to $20,000,000 at
the banks discretion. As of September 30, 2011 $2,935,000 is outstanding. On March 28, 2011, the
Company also refinanced the $5,000,000 Senior Subordinated Notes plus deferred interest from
proceeds of a $5,500,000 term note facility from the bank at a reduced interest rate. The Company
was in compliance with all covenants under both credit facilities as of September 30, 2011.
If necessary, we plan in the future to seek additional financing from banks and leasing
companies, or through public offerings or private placements of debt or equity securities,
strategic relationships, or other arrangements. In the event we fail to meet our financial
covenants with our bank, we may not have access through our line of credit to sufficient working
capital to pursue our growth strategy, or if our covenant non-compliance triggers a default, our
loans may be called requiring the repayment of all amounts on our loans.
Operating Activities
Cash utilized from our operating activities for the nine months ended September 30, 2011 was
$3.6 million compared to $0.7 million for the corresponding period in 2010. For the nine months
ended September 30, 2011, cash outflows consisted primarily of seasonal increases in inventory and
initial inventory stocking for new stores, payment of deferred interest and prepaid and other
assets of $4.6 million, as well as reductions in accrued expenses, income taxes payable
and other current liabilities of $1.3 million. Cash inflows were attributable to the results of
operations which consisted of net income, accounts payable, non-cash expenses of depreciation,
amortization and interest and other expenses, totaling $2.3 million of cash. For the nine months
ended September 30, 2010, cash outflows consisted primarily of seasonal increases in inventory of
$0.9 million, reduction in non-cash investment income of $0.4 million, reductions in accounts
payable of $0.6 million, increases in prepaid and other assets of $0.4 million and decreases in
accrued expenses and other liabilities of $0.4 million. Cash inflows were attributable to the
results of operations which consisted of net income, non-cash expenses of depreciation,
amortization, and interest and other expenses, which totaled $1.7 million.
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Investing Activities
Cash utilized from our investing activities was $701,000 for the nine months ended September
30, 2011 compared cash generated of $49,000 for the corresponding period in 2010. The increased
investing activities included retail store openings and improvements in 2011. During the same
period in 2010, the Companys investments in store improvements and HorsePharm were offset by the
dividend from the proceeds of the insurance settlement contract from our Hobby Horse investment.
Financing Activities
Net cash provided by our financing activities was $3.7 million for the nine months ended
September 30, 2011, compared to $0.6 million provided in the corresponding period in 2010. For the
nine months ended September 30, 2011, we funded our seasonal operating activities and store
expansions with net borrowings of $2.9 million under our revolving credit facility as well as
paying our subordinated note of $5.0 million and borrowing under a note term note for $5.5 million.
For the nine months ended September 30, 2010, we funded our seasonal operating activities with net
borrowings of $0.3 million under our revolving credit facility.
Revolving Credit Facility
On March 28, 2011, the Company and the bank amended the revolving line of credit agreement in
connection with the refinancing of the $5,000,000 senior subordinated notes. Under the amended
revolving line of credit, the Company can borrow up to $13,000,000, of which up to $1,000,000 can
be in the form of letters of credit, and increase this amount up to $20,000,000 at the discretion
of the bank. Any outstanding balances borrowed under the credit facility are due April 30, 2013.
The credit facility bears interest at the base rate, announced from time to time by the bank, plus
an applicable margin determined by the Companys funded debt ratio. As of September 30, 2011, the
LIBOR rate (base rate) was 0.23% plus the applicable margin of 2.20%. Interest is payable monthly.
At its option, the Company may have all or a portion of the unpaid principal under the credit
facility bear interest at various LIBOR or prime rate options.
The Company is obligated to pay commitment fees of 0.20% per annum on the average daily,
unused amount of the line of credit during the preceding quarter. All assets of the Company
collateralize the senior revolving credit facility. Under the terms of the credit facility, the
Company is subject to certain covenants including, among others, maximum funded debt ratios,
maximum debt to tangible net worth ratios, minimum fixed charge ratios, minimum current asset
ratios, and maximum capital expenditures.
Under the terms of this credit facility, the Company is subject to various covenants. At
September 30, 2011, the Company was in compliance with all of the covenants under the credit
facility.
Term Notes, Senior Subordinated Notes Payable and Warrants
On March 28, 2011, the Company borrowed $5,500,000 in the form of a 7-year term, note from the
bank to refinance the $5,000,000 senior subordinated notes and deferred interest on those notes.
The initial floating rate interest on the term note was 5.4% consisting of a 1.0% LIBOR floor plus
a 4.4% margin. On April 1, 2011 the company entered into an interest rate swap for the term note
to fix the interest rate at 7.4% on $3,900,000 of the principal. The remaining $1,600,000 of the
principal earns interest at a floating rate based on a base rate, with a minimum of 1.0% as
announced from time to time by the bank, plus an a 4.4% margin. As of September 30, 2011, the
LIBOR rate (base rate) was 0.23%. Interest is payable monthly. The Company is obligated to repay
$786,000 of principal annually commencing in April 2013 and extending to March 2018. The Company
is further obligated to accelerate repayment of up to $1,600,000 in principal in the event it has
excess cash flow determined by a cash flow recapture formula. All assets of the Company
collateralize the term note facility. Under the terms of the term note facility, the Company is
subject to certain covenants including, among others, maximum funded debt ratios, maximum debt to
tangible net worth ratios, minimum fixed charge ratios, minimum current asset ratios, and maximum
capital expenditures. The Company expects to realize significant interest savings as a result of
refinancing the senior subordinated notes.
In connection with the issuance of the subordinated notes, the Company issued warrants to the
note holders, exercisable at any time after December 11, 2007 for an initial 118,170 shares of its
common stock at a revised exercise price of $2.75 per share. The number of shares to be received
for the warrants, upon exercise, is subject to change in the event of additional equity issuances
and/or stock splits. The warrants were estimated to have a fair value of $272,000, which was
reflected as a discount of the proceeds. The discount was amortized through interest expense while
the notes were outstanding and the unamortized discount was fully expensed at refinancing. The
warrants issued in connection with the subordinated notes are still outstanding and terminate on
December 10, 2016.
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Working Capital and Capital Expenditure Needs
The Company believes our existing cash, cash equivalents, expected cash to be provided by our
operating activities, and funds available through our revolving credit facility will be sufficient
to meet our currently planned working capital and capital expenditure needs over at least the next
twelve months. We anticipate increasing capital expenditures by adding stores in 2011 and beyond.
Our future capital requirements will depend on many factors, including our rate of revenue growth,
the expansion of our marketing and sales activities, the increase in the number of our retail
stores, the acquisition of new capabilities or technologies and the continuing market acceptance of
our products. To the extent that existing cash, cash equivalents, cash from operations and cash
from our revolving credit facility under the conditions and covenants of our credit facilities are
insufficient to fund our future activities, we may need to raise additional funds through public or
private equity or debt financing. Although we are currently not a party to any agreement or letter
of intent with respect to potential investments in, or acquisitions of, businesses, services or
technologies which we anticipate would require us to seek additional equity or debt financing, we
may enter into these types of arrangements in the future. There is no assurance that additional
funds would be available on terms favorable to us or at all. Funds from our revolving credit
facility may not be available if we fail to meet the financial covenants contained in the loan
agreements with our lender. At September 30, 2011, the Company was in compliance with all of its
covenants under the credit facility.
Critical Accounting Policies and Estimates
The Companys consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the U.S. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, costs and expenses, and related disclosures. We evaluate our
estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates.
A summary of significant accounting policies and a description of accounting policies that are
considered critical may be found in our 2010 Annual Report on Form 10-K, filed on March 31, 2011,
in Note 2 of the Notes to the Consolidated Financial Statements and the Critical Accounting
Policies and Estimates section of Managements Discussion and Analysis of Financial Condition and
Results of Operations; as supplemented by the disclosures in this Quarterly Report in the Notes to
Condensed Consolidated Financial Statements. In addition, we define our same store sales to
include sales from all stores open for a full fifteen months following a grand opening, or a
conversion to a Dover-branded store.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
At September 30, 2011, there had not been a material change in any of the market risk
information disclosed by the Company in our Annual Report on Form 10-K for the year ended December
31, 2010. More detailed information concerning market risk can be found in Item 7A under the
sub-caption Quantitative and Qualitative Disclosures about Market Risk of the caption
Managements Discussion and Analysis of Financial Condition and Results of Operations on page 37
of our Annual Report on Form 10-K for the year ended December 31, 2010.
The Companys objectives in managing our long-term exposure to interest rate and foreign
currency rate changes are to limit the material impact of the changes on cash flows and earnings
and to lower our overall borrowing costs. We have calculated the effect of a 10% change in interest
rates over a month-long period for both our debt obligations and our marketable securities
investments and determined the effect to be immaterial. We do not foresee or expect any significant
changes in the management of foreign currency or interest rate exposures or in the strategies we
employ to manage such exposures in the near future.
Foreign Currency Risk
Nearly all of the Companys revenues are derived from transactions denominated in U.S.
dollars. We purchase products in the normal course of business from foreign manufacturers. As
such, we have exposure to adverse changes in exchange rates associated with those product
purchases, but this exposure has not been significant.
Interest Rate Sensitivity
The Company has cash and cash equivalents totaling $151,000 at September 30, 2011. The
unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into
investments for trading or speculative purposes. We intend to maintain our portfolio of cash
equivalents, including money market funds and certificates of deposit. Due to the short-term nature
of these investments, we believe that we do not have any material exposure to changes in the fair
value as a result of changes in interest rates. As of September 30, 2011, all of our investments
were held in money market funds.
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The Companys exposure to market risk also relates to the increase or decrease in the amount
of interest expense we must pay our outstanding debt instruments, primarily certain borrowings
under our revolving credit facility and on the $1,600,000 of the term notes that bear interest at a
floating rate. The advances under this revolving credit facility and the $1,600,000 of principal of
the term note bear a variable rate of interest determined as a function of the prime rate or the
published LIBOR rate at the time of the borrowing. If interest rates were to increase by two
percent, the additional interest expense as of September 30, 2011 would be approximately $59,000
annually. At September 30, 2011, $2,935,000 was outstanding under our revolving credit facility.
The Company uses interest rate swap contracts as cash flow hedges to eliminate the cash flows
exposure of interest rate movements on variable rate debt. The Companys term note is a variable
rate instrument. The Company entered into an interest rate swap contract under which the Company
agreed to pay an amount equal to a specified fixed rate of interest on a notional principal amount
and to receive in turn an amount equal to a specified variable rate of interest on the same
notional principal amount.
On April 1, 2011 the Company entered into a 7-year interest rate swap contract on the notional
value of $3,900,000 of the term note which requires payment of a fixed interest rate of interest
(7.4%) and the receipt of a variable rate of interest, based on one month LIBOR rate, on the
$3,900,000.
The Company designated this interest rate swap contract as an effective cash flow hedge. The
Company anticipates that this contract will continue to be effective. The Company does not hold
any derivative instruments that are not designated as a hedging instrument.
Item 4. | Controls and Procedures. |
The Companys management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and procedures as of
September 30, 2011. The term disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means
controls and other procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified in the SECs rules
and forms. Disclosure controls and procedures include controls and procedures designed to ensure
that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the Companys management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives, and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of the Companys disclosure controls and procedures as of
September 30, 2011, our chief executive officer and chief financial officer concluded that, as of
such date, our disclosure controls and procedures were effective at the reasonable assurance level.
The Company maintains certain internal controls over financial reporting that are appropriate,
in managements judgment with similar cost-benefit considerations, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted accounting principles. No change in
our internal control over financial reporting occurred during the fiscal quarter ended September
30, 2011 that has materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings. |
From time to time, the Company is exposed to litigation relating to our products and
operations. The Company is not currently engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material, adverse affect on our financial condition or
results of operations.
Item 1A. | Risk Factors. |
An investment in our common stock involves a high degree of risk. You should
carefully consider the specific risk factors listed under Part I, Item 1A of our Annual Report for
the year ended December 31, 2010 on Form 10-K filed with the SEC on March 31, 2011, together with
all other information included or incorporated in our reports filed with the Securities and
Exchange Commission. Any such risks may materialize, and additional risks not known to us, or that
we now deem immaterial, may arise. In such event, our business, financial condition, results of
operations or prospects could be materially adversely affected. If that occurs, the market price of
our common stock could fall, and you could lose all or part of your investment.
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This Quarterly Report on Form 10-Q includes or incorporates 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 use of
the words believes, anticipates, plans, expects, may, will, would, intends,
estimates, and other similar expressions, whether in the negative or affirmative. We cannot
guarantee that we actually will achieve the plans, intentions or expectations disclosed in the
forward-looking statements made. We have included important factors in the cautionary statements
below that we believe could cause actual results to differ materially from the forward-looking
statements contained herein. The forward-looking statements do not reflect the potential impact of
any future acquisitions, mergers or dispositions. We do not assume any obligation to update any
forward-looking statements contained herein. In addition to the list of significant risk factors
set forth in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2010,
we continue to call your attention to the following information that might be considered material
in evaluating the risks of our business and an investment in our common stock:
The Companys business may be adversely affected by pricing pressures from fluctuations in energy
and/or commodity costs.
Fluctuations in the price, availability and quality of fabrics and other raw materials used to
manufacture the Companys products, as well as the price for labor and transportation have
contributed to, and may continue to contribute to, ongoing pricing pressures throughout the
Companys supply chain. The price and availability of such inputs to the manufacturing process may
fluctuate significantly, depending on several factors, including commodity costs (such as higher
cotton prices), energy costs (such as fuel), inflationary pressures from emerging markets,
increased labor costs, weather conditions and currency fluctuations. Any or all of these impacts
could have a material adverse impact on the Companys business, financial condition and results of
operations. We may be unable to pass such price increases along to the Companys customers and be
unable to maintain the Companys gross margins. In addition, the increase in energy and commodity
costs could adversely affect consumer spending and demand for the Companys products.
Current economic conditions and the global financial crisis may have an impact on our business and
financial condition in ways that we currently cannot predict.
Although the recession that started in December 2007 ended in 2009, the recovery has been
uneven and slow. Unemployment is at 9.1% in the U.S. as of September 30, 2011. It is not clear
when a sustained robust economic recovery will begin. The recent historical decrease and any future
decrease in economic activity in the United States or in other regions of the world in which we do
business could adversely affect our financial condition and results of operations. Continued and
potentially increased volatility, instability and economic weakness, together with political
instability in emerging markets and potential higher energy and fuels costs and a resulting
decrease in discretionary consumer and business spending may result in a reduction in our revenues.
We currently cannot predict the extent to which our revenues may be impacted. In addition,
financial challenges experienced by our suppliers or distributors could result in product delays
and discontinuances, a lack of new products, inventory imbalances and/or cost increases, and less
favorable trade credit terms.
The Companys cost savings initiatives may have a negative impact on our market share in the short
run.
During 2009 and 2010, through our cost-cutting initiatives, we reduced operating expenses.
Much of these savings were achieved through decreased marketing expenditures and reductions in
labor hours. We believe these measures were necessary and appropriate to maintain the health of
our business in response to current economic conditions. However, as we renew our efforts to
stimulate demand, some of our historic cost-cutting measures may delay our ability to accelerate
sales without further investment.
A decline in discretionary consumer spending and related externalities could reduce our revenues.
The Companys revenues depend to a degree on discretionary consumer spending, which may
decrease due to a variety of factors beyond our control. These include unfavorable general
business, financial and economic conditions, increases in interest rates, increases in inflation,
stock market uncertainty, war, terrorism, fears of war or terrorism, increases in consumer debt
levels and decreases in the availability of consumer credit, adverse or unseasonable weather
conditions, adverse changes in applicable laws and regulations, increases in taxation, adverse
unemployment trends and other factors that adversely influence consumer confidence and
spending. Any one of these factors could result in adverse fluctuations in our revenues generally.
Our revenues also depend on the extent to which discretionary consumer spending is directed towards
recreational activities generally and equestrian activities and products in particular. Reductions
in the amounts of discretionary spending directed to such activities would reduce our revenues.
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The Companys customers purchases of discretionary items, including our products, may decline
during periods when disposable income is lower, or periods of actual or perceived unfavorable
economic conditions. If this occurs, our revenues would decline, which may have a material adverse
effect on our business.
Material changes in cash flow and debt levels may adversely affect our growth and credit
facilities, require the immediate repayment of all our loans, and limit the ability to open new
stores.
During seasonal and cyclical changes in our revenue levels, to fund our retail growth
strategy, and to fund increases in our direct business, we make use of our credit facilities, which
are subject to EBITDA, total debt, tangible net worth and related covenants. If we are out of
compliance with our covenants at the end of a fiscal period, it may adversely affect our growth
prospects, require the consent of our lender to open new stores or in the worst case, trigger a
loan default and require the repayments of all amounts then outstanding on our loans. In the event
of our insolvency, liquidation, dissolution or reorganization, the lender under our revolving
credit facility and term note would be entitled to payment in full from our assets before
distributions, if any, were made to our stockholders.
In order to execute our retail store expansion strategy, we may need to borrow additional
funds, raise additional equity financing or finance our planned expansion from profits. Our
borrowings may be restricted by financial covenants; or we may also need to raise additional
capital in the future to respond to competitive pressures or unanticipated financial requirements.
We may not be able to obtain additional financing, including the extension or refinancing of our
revolving credit facility, on commercially reasonable terms or at all. A failure to obtain
additional financing or an inability to obtain financing on acceptable terms could require us to
incur indebtedness at high rates of interest or with substantial restrictive covenants, including
prohibitions on payment of dividends.
We may obtain additional financing by issuing equity securities that will dilute the ownership
interests of existing shareholders. If we are unable to obtain additional financing, we may be
forced to scale back operations or be unable to address opportunities for expansion or enhancement
of our operations.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
The Company did not issue or sell any equity securities in the three months ended September
30, 2011.
Item 3. | Defaults Upon Senior Securities. |
There were no defaults on the Companys senior securities in the three months ended September
30, 2011.
Item 4. | Submission of Matters to a Vote of Security Holders. |
[Reserved]
Item 5. | Other Information. |
Not applicable.
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Item 6. | Exhibits. |
Exhibit List
Number | Description | |
*31.1 | Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
|
*31.2 | Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
|
32.1 | Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350 |
* | Filed herewith. | |
| Furnished herewith. | |
| Indicates a management contract or compensatory plan or arrangement |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DOVER SADDLERY, INC. |
||||
Dated: November 14, 2011 | By: | /s/ David R. Pearce | ||
David R. Pearce, Chief Financial Officer | ||||
(Principal Financial Officer) | ||||
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EXHIBIT INDEX
Number | Description | |
*31.1 | Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
|
*31.2 | Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
|
32.1 | Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18
U.S.C. Section 1350 |
* | Filed herewith. | |
| Furnished herewith. | |
| Indicates a management contract or compensatory plan or arrangement |
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