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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2003
OR
[ ] TRANSITION REPORT UNDER 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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(Name of small business issuer in its charter)
FLORIDA 65-0680967
--------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of 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)
Issuer's telephone number: (954) 979-5995
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
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 [ ]
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained in this form, and
no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference to Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year.
$54,975,000 for the 12 months ended March 31, 2003.
State 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 sold, or the average bid and
asked price of such common equity, as of a specific date within
the past 60 days. The aggregate market value of the voting and
non-voting common equity held by non-affiliates computed by
reference to the price at which common equity was sold is
$29,903,000 at June 13, 2003.
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date. As
of June 13, 2003, 19,105,044 shares of common stock are issued
and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB into which
the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) of the Securities
Act of 1933 ("Securities Act"). The listed documents should be
clearly described for identification purposes.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
PETMED EXPRESS, INC.
Form 10-KSB
INDEX
PART I.......................................................... 3
Item 1. Description of Business............................... 3
Item 2. Description of Property............................... 11
Item 3. Legal Proceedings..................................... 11
Item 4. Submission of Matters to a Vote of Security Holders... 12
PART II......................................................... 13
Item 5. Market for Common Equity and Related Stockholder
Matters............................................... 13
Item 6. Management's Discussion and Analysis or Plan of
Operation............................................. 15
Item 7. Financial Statements.................................. 18
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure................... 18
PART III........................................................ 19
Item 9. Directors, Executive Officers, Promoters and
Control Persons....................................... 19
Item 10. Executive Compensation................................ 21
Item 11. Security Ownership of Certain Beneficial Owners
and Management........................................ 24
Item 12. Certain Relationships and Related Transactions........ 25
Item 13. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................... 26
Item 14. Controls and Procedures............................... 27
SIGNATURES...................................................... 28
CERTIFICATIONS.................................................. 29
1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS AND RISK FACTORS
This discussion in this annual report regarding PetMed Express
and our business and operations contains "forward-looking
statements." These forward-looking statements use words such as
"believes," "intends," "expects," "may," "will," "should,"
"plan," "projected," "contemplates," "anticipates," or similar
statements. 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-KSB, "PetMed
Express," "1-800-PetMeds," "PetMed," "1-888-PetMeds," "PetMed
Express.com," "the Company," "we," "our," and "us" refers to
PetMed Express, Inc. and our subsidiaries.
2
PART I
Item 1. Description of Business.
General
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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 along with
health and nutritional supplements for dogs and cats direct to
the consumer. The Company offers consumers an attractive
alternative for obtaining pet medications in terms of
convenience, price, and speed of delivery.
The Company markets its products through national television,
on-line and direct mail advertising campaigns, which aim to
increase the recognition of the "1-800-PetMeds" brand name,
increase traffic on its web site at www.1800PetMeds.com, acquire
new customers, and maximize repeat purchases. Our fiscal year
end is March 31, and our executive offices are located at 1441
S.W. 29th Avenue, Pompano Beach, Florida 33069, telephone number
is 954-979-5995. The information contained on the Company's web
site is not part of our annual report.
Our Products
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We offer a broad selection of products for dogs and cats.
These products include a majority of the well-known brands of
medication, such as Frontline[R], Advantage[R], Heartgard[R],
Sentinel[R], Interceptor[R], Program[R], Revolution[R], and
Rimadyl[R]. Generally, our prices are discounted up to 25%, from
the prices for medications charged by veterinarians.
We 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
web site is designed to give us the flexibility to change
featured products or promotions. Our product line provides
customers with a wide variety of selections across the most
popular health categories for dogs and cats. Our current
products include:
Prescription Medications: Heartworm medications, antibiotics,
anti-inflammatory medications and medications for chronic
diseases, such as arthritis and thyroid conditions, as well as
several generic substitutes;
Non-Prescription Medications: A majority of the well-known
flea and tick control products; and health and nutritional
supplements.
Sales
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The following table provides a breakdown of the percentage of
our total sales, by each category during the indicated periods:
Fiscal Year
--------------------------------
March 31, 2003 March 31, 2002
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Prescription medications 29% 34%
Non-prescription medications 64% 58%
Shipping and handling charges
and other 7% 8%
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Total 100% 100%
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During March 2001, the Company discontinued the sales of all
accessories. Additionally, the Company discontinued the PetMed
Express, Inc. membership plan. It was determined by management
to concentrate sales efforts on the prescription and non-
prescription pet medications and the health and nutritional pet
supplements.
We offer our products through three main sales channels,
including the PetMed Express catalog and postcards, customer
service representatives and the Internet, through our web site.
We have designed both our catalog and web site to provide a
convenient, cost-effective and informative shopping experience
that encourages consumers to purchase products important for a
pet's health and quality of life. We believe that these multiple
channels allow us to increase the visibility of our brand name
and provide customers with increased shopping flexibility and
service.
The PetMed Express Catalog
The PetMed Express catalog is a full-color catalog that
features approximately 300 products. The catalog is produced by
a combination of in-house writers, production artists and
independent contractors. We mail catalogs and postcards in
response to requests generated from our advertising and direct
mail campaigns.
3
Contact Center
We currently employ 100 customer service representatives in
our contact center. Our customer service representatives receive
and process inbound customer calls, facilitate our outbound
campaigns around maximizing customers' reorders on a consistent
basis, facilitate our live web chat and process customer e-mails.
Our telephone system is equipped with certain features including
pop-up screens and call blending capabilities that give us the
ability to efficiently utilize our customer service
representatives' time, providing quality customer service and
support. Our customer service representatives receive a base
salary and are rewarded with commissions for achieving targeted
sales.
Our Web Site
We seek to combine our product selection and pet health
information with the shopping ease of the Internet to deliver a
convenient and personalized shopping experience. We believe that
our web site offers health and nutritional product selections for
dogs and cats, supported by relevant editorial and easily
obtainable or retrievable resource information. From our home
page, customers can search our web site for products and access
resources on a variety of information on cats and dogs.
Customers can shop at our web site by category, product line or
individual product. We attracted approximately 3.8 million
visitors to our website over the past 12 months (June 2002 to May
2003), of which 12% of those visitors resulted in a sale, and our
website generated 44% of our total sales for the same time
period.
Our Customers
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As of May 31, 2003, approximately 830,000 customers have
purchased from us within the last eighteen months. During fiscal
2003, we attracted approximately 414,000 new customers. Our
customers are located throughout the United States, with the
largest concentration of customers residing in California,
Florida, Texas, New York, Georgia, Virginia and New Jersey. The
average retail purchase was approximately $71.
While our primary focus has been on retail customers, we have
also sold various non-prescription medications wholesale to a
variety of businesses, including pet stores, groomers and
traditional brick and mortar stores in the United States. For
the fiscal year ended March 31, 2003, the majority of our sales
were made to retail customers with less than 1% of our sales made
to wholesale customers. Our focus remains on the retail
customers, and we anticipate that the percentage of our total
sales attributable to wholesale sales will continue to decrease
in the future.
Marketing
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The goal of our marketing strategy is to build brand
recognition, increase customer traffic, add new customers, build
strong customer loyalty, maximize reorders and develop
incremental revenue opportunities. We have an integrated
marketing campaign that includes television advertising, direct
mailing and e-mailing and online marketing.
Television Advertising
Our television advertising is designed to build brand equity,
create awareness, and generate initial purchases of products via
phone, mail, fax and the Internet. We have used 30 and 15 second
television commercials to attract new customer orders, with this
tagline "your pets same exact medications delivered to your home,
saving you time and money". Our television commercials typically
focus on our ability to rapidly deliver to customers the same
medications offered by veterinarians, but at reduced prices. We
generally purchase advertising on national cable channels to
target our key demographic groups. We believe that television
advertising is particularly effective and instrumental in
building brand awareness.
Direct Mailing and E-mailing
We use direct mailing and e-mailing, for our customers with e-
mail accounts, to advertise our products to selected groups of
customers. We utilize potential customers from the responses to
our television advertising and our customer database to encourage
and remind our customers to reorder.
Online Marketing
We supplement our traditional advertising with online
advertising and marketing efforts. We are members of the
LinkShare Network, which is an affiliate program with merchant
clients and affiliate web sites. This network is designed to
develop and build a long-term, branded affiliate program in order
to increase online sales and establish an Internet presence. The
LinkShare Network enables us to establish link arrangements with
other web sites, as well as portals and search engines. We also
make our brand available to internet consumers by publishing
targeted keywords and achieving prominent placement on the top
search engines and search engine networks, including Google,
Microsoft Network, Yahoo, and Overture.
4
Operations
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Purchasing
We purchase our products from a variety of sources, including
certain manufacturers, domestic distributors, and wholesalers.
We have multiple suppliers for each of our products. We source
prescription and non-prescription medications from a variety of
national distributors in order to obtain the lowest cost. We
purchase the majority of our health and nutritional supplements
directly from manufacturers. See Risk Factors. Having strong
relationships with product manufacturers will ensure the
availability of adequate volume of products ordered by our
customers, and enable us to provide more and better product
information. Historically, substantially all the major
manufacturers of prescription and non-prescription medications
have declined to sell these products to direct marketing
companies, including us. As part of our growth strategy, we will
seek to develop direct relationships with 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 service representatives. Our call center
generally operates from 8:00 AM to 11:00 PM Monday through
Thursday, 8:00 AM to 9:00 PM on Friday, 9:00 AM to 6:00 PM on
Saturday, and 10:00 AM to 5:00 PM on Sunday, Eastern Standard
Time. The process of customers purchasing products through
PetMed Express consists of a few simple steps. A customer first
places a call to the PetMed Express toll free phone number or
visits our web site. The following information is needed to
process prescription orders: general pet information,
prescription, and the veterinarian's name and phone number. This
information is entered into our computer system. Then our
pharmacists and pharmacy technicians verify all prescriptions.
The order process system checks for prescription verification for
medication orders and a valid payment method for all orders. An
invoice is generated and printed in our fulfillment center, where
items are picked for shipping. The customer's order is then
selected from the Company's inventory and shipped via priority
mail or United Parcel Service. Our customers enjoy the
convenience of rapid home delivery, with approximately 69% of all
orders are shipped within 24 hours via priority mail or United
Parcel Service. Our web site allows customers to easily browse
and purchase substantially all of our products and services on
line. Our site is designed to be fast, secure and easy to use
with order and shipping confirmations, with on-line order
tracking capabilities.
Warehousing and Shipping
We inventory our products and fill all customer orders from
our 32,000 square foot facility in Pompano Beach, Florida. We
have an in-house fulfillment and distribution operation, which is
used to manage the entire supply chain, beginning with the
placement of the order, continuing through order processing, and
then fulfillment and shipment of the product to the customer. We
offer a variety of shipping options, including next day delivery.
We ship to anywhere in the United States served by the United
Parcel Service or the United States Postal Service. Priority
orders are expedited in our fulfillment process. Our goal is to
ship the products the same day that the order is received. For
prescription medications, our goal is to ship the product
immediately after the prescription has been authorized.
Customer Service and Support
We believe that a high level of customer service and support
is critical in retaining and expanding our customer base.
Customer service representatives participate in ongoing training
programs under the supervision of our training manager. These
training sessions include a variety of topics such as product
knowledge, computer usage, customer service tips and the
relationship between PetMed Express and veterinarians. Our
customer service representatives respond to customer's e-mails
and calls that are related to order status, prices and shipping.
Our customer service representatives also respond to customers
through our newly implemented live web chat. If our customer
service representatives are unable to respond to a customer's
inquiry at the time of the call, we strive to provide an answer
within 24 hours. We believe our customer service representatives
are a valuable source of feedback regarding customer
satisfaction. Our customer returns and credits average
approximately 1.6% of total sales.
Technology
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PetMed Express utilizes the latest integrated technologies in
call center, e-commerce, order entry, and inventory
control/fulfillment operations. The systems are custom
configured by the Company to optimize our computer telephone
integration and mail order processing. The system is designed to
maintain a large database of specialized information and process
a large volume of orders efficiently and effectively. Our
systems provide our agents with real time product availability
information and updated customer information to enhance our
customer service. We also have an integrated direct connection
for processing credit cards to ensure that a valid credit card
number and authorization have been received at the same time our
agents are on the phone with the customers. Our information
systems provide our agents 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.
5
Competition
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The pet medications and health and nutritional supplements
market is competitive and highly fragmented. Our competitors can
be divided into several groups including: veterinarians, other
mail-order suppliers of pet medications and health and
nutritional supplements, and web or online stores that specialize
in pet medications and health and nutritional supplements. The
Company believes that the following are principal competitive
factors in our market:
* Product selection and availability, including the
availability of prescription and non-prescription
medications;
* Brand recognition;
* Reliability and speed of delivery;
* Personalized service and convenience;
* Price; and
* Quality of web site content.
We compete with veterinarians in the sale of prescription and
non-prescription pet medications and health and nutritional
supplements. Many pet owners may prefer the convenience of
purchasing the pet medications or health and nutritional
supplements at the time of the veterinarian visit, or may be
hesitant to offend their veterinarian, by not purchasing these
products from the veterinarian. In order to effectively compete
with veterinarians, we must continue to educate pet owners about
the service, convenience and savings offered by PetMed Express.
We also compete with brick and mortar and online retailers of
non-prescription medications and health and nutritional
supplements. Many of these competitors have longer operating
histories, larger customer or user bases, a more established
online presence, greater brand recognition and significantly
greater financial, marketing and other resources than we do.
Many of these current and potential competitors can devote
substantially more resources to web site and systems development
than we can.
The pet medication market size is estimated to be
approximately $3 billion, with veterinarians having the majority
of the market share. The cat and dog population is approximately
141 million, with approximately 62% of all households owning a
pet.
The Company believes that the following are the main
competitive strengths which differentiate 1-800-PetMeds's from
the competition:
* Experienced management team;
* Consumer benefit structure of savings and convenience;
* Licensed pharmacy to conduct business in 49 states;
* Operating / technology infrastructure in place;
* Multiple sources of supply for pet medications; and
* Quality customer service support.
Intellectual Property
---------------------
We conduct our business under the trade name "1-800-PetMeds".
We believe this name, which is also a toll-free phone number, has
added significant value and is an important factor in the
marketing of our products. We have also obtained the right to
the Internet addresses www.1800PetMeds.com, www.1888PetMeds.com,
www.petmedexpress.com, along with www.petmeds.com. As with
phone numbers, we do not have and cannot acquire any property
rights in an Internet address. We do not expect to lose the
ability to use the Internet addresses; however, there can be no
assurance in this regard and the loss of these addresses may have
a material adverse effect on our financial position and results
of operations. We hold the trade name "PetMed Express[R]" and
"1-888-PetMeds[R]", which are our registered trademarks.
Government Regulation
---------------------
Dispensing prescription medicines is governed at the state
level by the board of pharmacy, or similar regulatory agencies,
of each state where prescription medications are dispensed. We
are subject to regulation by the State of Florida and, in
particular, are licensed by the Florida Board of Pharmacy. Our
license is valid until February 28, 2004. We are also licensed
and/or regulated by 48 other state pharmacy boards and other
regulatory authorities including, but not necessarily limited to,
the Food and Drug Administration ("FDA") and the United States
Environmental Protection Agency ("EPA"). As a licensed pharmacy
in the State of Florida, we are subject to the Florida Pharmacy
Act and regulations promulgated hereunder. To the extent that we
are unable to maintain our license with the Florida Board of
Pharmacy as a community pharmacy, or if we do not maintain the
licenses granted by other state boards, or if we become subject
to actions by the FDA, or other enforcement regulators, our
distribution of prescription medications to pet owners could
cease, which could have a material adverse effect on our
operations. See Item 3. Legal Proceedings.
6
Employees
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The Company currently has 164 full time employees, including:
100 in marketing and customer service; 16 in fulfillment and
purchasing; 37 in our pharmacy; 2 in information technologies; 5
in administrative positions; and 4 in management. None of the
Company's employees are represented by a labor union, nor
governed by any collective bargaining agreements. 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.
We have only recently attained profitability and there are no
assurances that we can sustain profitable operations in future
periods.
While we reported net income of approximately $3,258,000 and
$825,000 for the years ended March 31, 2003 and 2002,
respectively, we reported a net loss of approximately $2,827,000
for the year ended March 31, 2001 and have an accumulated deficit
at March 31, 2003 of approximately $1,714,000. Our profitability
during fiscal 2003 is due in part to an increase in our revenues
of approximately $22,949,000, or approximately 72%, from fiscal
2002. There are no assurances we will continue to generate
revenues at this increased level, or that we will remain
profitable during fiscal 2004 and beyond. 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.
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 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 to 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's
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 reside in another state from
the animal. In February 2002, we voluntarily ceased the use of
the alternate veterinarian program, and in March 2002 a business
decision was made to enter into a settlement agreement with the
Florida Board of Pharmacy. See Item 3. Legal Proceedings. Many
of the complaints were for prescriptions verified through our
alternate veterinarian program. The alternate veterinarian
program used a veterinarian outside the state of Florida to
verify the prescription for certain pets outside the state of
Florida. The program was not used for pets residing in the State
of Florida. Future complaints may be brought against 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 our prescription and non-prescription
medications from third party distributors and we are not an
authorized distributor of those products. We do not have any
guaranteed supply of these medications at any pre-established
prices.
For the fiscal year ended March 31, 2003, approximately 93% of
our sales were attributable to sales of prescription and non-
prescription medications. Sales of these products have also
accounted for 92% of our total sales during the fiscal year ended
March 31, 2002. Historically, substantially all the major
pharmaceutical manufacturers have declined to sell prescription
and non-prescription pet medications directly to us. In order to
assure a supply of these products, we purchase medications from
various secondary sources, including a variety of domestic
distributors. Our business strategy includes seeking to
establish direct purchasing arrangements with major pet
pharmaceutical manufacturing companies. If we were not
successful in achieving this goal, we would continue to rely upon
distributors.
7
We cannot guarantee that if we continue to purchase
prescription and non-prescription pet medications from secondary
sources that we will be able to purchase an adequate supply to
meet our customers' demands, or that we will be able to purchase
these products at competitive prices. As these products
represent a significant portion of our sales, our failure to fill
customer orders for these products could adversely impact our
sales. If we should be forced to pay higher prices for these
products to ensure an adequate supply, we cannot guarantee that
we will be able to pass along to our customers any increases in
the prices we pay for these medications. This inability to pass
along increased prices could materially adversely affect our
results of operations.
Our failure to properly manage our inventory may result in
excessive inventory carrying costs, which could materially
adversely affect our financial condition and results of
operations.
Our current product line contains approximately 600 SKUs in
the fiscal year ended March 31, 2003. A significant portion of
our sales is attributable to products representing approximately
90 SKUs. We need to properly manage our inventory to provide an
adequate supply of these products and avoid excessive inventory
of the products representing the balance of the SKUs. We
generally place orders for products with our suppliers based upon
our internal estimates of the amounts of inventory we will need
to fill future orders. These estimates may be significantly
different from the actual orders we receive. In the event that
subsequent orders fall short of original estimates, we may be
left with excess inventory. Significant excess inventory could
result in price discounts and increased inventory carrying costs.
Similarly, if we fail to have an adequate supply of some SKUs, we
may lose sales opportunities. We cannot guarantee that we will
maintain appropriate inventory levels. Any failure on our part
to maintain appropriate inventory levels may have a material
adverse effect on our financial condition and results of
operations.
Resistance from veterinarians to authorize prescriptions could
cause our sales to decrease and could materially adversely affect
our financial condition and results of operations.
Since we began our operations, from time to time, some
veterinarians have resisted providing our customers with a copy
of their pet's prescription or authorizing the prescription to
our pharmacy staff, thereby effectively preventing us from
filling such prescriptions under state law. Sales of
prescription medications represented approximately 29% and 34% of
our sales for the fiscal years ended March 31, 2003 and 2002,
respectively. Although veterinarians in some states are required
by law to provide the pet owner with this prescription
information, if the number of veterinarians who refuse to
authorize prescriptions should increase, our sales could decrease
and our financial condition and results of operations may be
materially adversely impacted.
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 results of operations
may be materially adversely affected.
The direct marketing of prescription and non-prescription pet
medications and health and nutritional supplements is in its
infancy. 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 consumers' purchasing patterns away from
veterinarians to us. If we do not attract consumers to purchase
these products from us, our results of operations may be
materially adversely impacted.
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 have purchased a portion of our prescription
and non-prescription medications from international distributors
in the past. These medications may be trademarked and/or
copyrighted products manufactured in foreign countries or in the
United States and sold by the manufacturer to foreign
distributors. Some of the prescription and non-prescription
medications may have been manufactured by entities, particularly
foreign licensees, who are not the licensors or owners of the
trademarks or copyrights for the medications. From time to time,
United States trademark and copyright holders, their licensees,
trade associations and the United States Customs Service have
brought forth litigation or administrative agency proceedings in
an attempt to halt the importation or sale of trademarked and/or
copyrighted products. The courts remain divided on the extent to
which trademark, copyright or other laws, rules, regulations or
decisions may restrict the importation or sales of this
merchandise without the consent of the trademark or copyright
owner. 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 almost all 50
states, approximately 53% of our sales for the fiscal year ended
March 31, 2003 were made to customers located in the states of
California, Florida, Texas, New York, Georgia, Virginia and New
Jersey. 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.
8
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 in the
sale of pet medications and health and nutritional supplements.
Veterinarians hold a competitive advantage over us because many
pet owners may find it more convenient or preferable to purchase
these products directly from their veterinarians at the time of
an office visit. We also compete directly and indirectly with
both online and traditional retailers of pet medications and
health and nutritional supplements. Both online and traditional
retailers may hold a competitive advantage over us because of
longer operating histories, established brand names, greater
resources and an established customer base. Online retailers may
have a competitive advantage over us because of established
affiliate relationships to drive traffic to their web site.
Traditional retailers may hold a competitive advantage over us
because pet owners may prefer to purchase these products from a
store instead of online or through traditional catalog/telephone
methods. In order to effectively compete in the future, we may
be required to offer promotions and other incentives, which may
result in lower operating margins or increased operating losses.
We also face a significant competitive 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 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 web site 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
web site, we face potential liability for negligence, copyright
infringement, patent infringement, trademark infringement,
defamation and other claims based on the nature and content of
the materials we post. Various claims have been brought, and
sometimes successfully prosecuted, against Internet content
distributors. We could be exposed to liability with respect to
the unauthorized duplication of content 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 propriety rights of
others.
We rely on a combination of trademark, trade secret, copyright
laws and contractual restrictions to protect our intellectual
property. These afford only limited protection. Despite our
efforts to protect our proprietary rights, unauthorized parties
may attempt to copy our non-prescription private label generic
equivalents, when and if developed, as well as aspects of our
sales formats, or to obtain and use information that we regard as
proprietary, including the technology used to operate our web
site, our content and our trademarks.
Litigation or proceedings before the United States Patent and
Trademark Office may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets and
domain names, and to determine the validity and scope of the
proprietary rights of others. Any litigation or adverse priority
proceeding could result in substantial costs and diversion of
resources, and 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 name 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.
9
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 interruptions or
disruptions to major transportation infrastructure or other
events that do not occur on our premises.
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. Industry seasonality trends, according to Fountain
Agricounsel LLC, Management Consultants to Agribusiness, are
divided into percentage of industry sales by quarter. For the
quarters ended March 31, June 30, September 30, and December 31
industry sales are 19%, 37%, 28%, and 16%, respectively.
In addition to the seasonality of our sales, our annual and
quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of
factors, many of which are out of our control. Factors that may
cause our operating results to fluctuate include:
* Our inability to obtain new customers at a reasonable
cost, retain existing customers, or encourage reorders;
* Our inability to increase the number of visitors to our
web site, or our inability to convert visitors to our
web site into customers;
* The mix of medications and other pet products sold by
us;
* Our inability to manage inventory levels;
* Our inability to adequately maintain, upgrade and
develop our web site, the systems that we use to
process customer's 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 results of operations in future periods.
Our shares of common stock currently have a limited trading
market.
Our shares of common stock are currently quoted on the OTC
Bulletin Board. Our shares of common stock currently have only a
limited trading market. As a result, you may find it difficult
to dispose of shares of our common stock and you may suffer a
loss of all or a substantial portion of your investment in our
common stock.
Our stock price fluctuates from time to time and may fall below
expectations of securities analysts and investors, and could
subject us to litigation, which may result in you suffering the
loss of your investment.
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.
It is likely that in some future quarter our operating results
may fall below the expectations of securities analysts and
investors, which could result in a decrease in the trading price
of our common stock. In the past, securities class action
litigation has often been brought against a company following
periods of volatility in the market price of its securities. We
may be the targets of similar litigation in the future.
Securities litigation could result in substantial costs and
divert management's attention and resources, which could
seriously harm our business and operating results.
10
The interests of our controlling stockholders could conflict with
those of our other stockholders.
Tricon Holdings, LLC, ("Tricon") our principal shareholder, own
and control 38.7% of our voting securities and together with the
exercise of 2,160,000 warrants, would own and control 44.9% of
our voting securities. Guven Kivilcim, member of Tricon, and one
of our directors, owns and controls 9.5% of our voting
securities and together with the exercise of 540,000 warrants,
would own and control 11.9% of our voting securities. These
shareholders collectively have a 54.6% beneficial ownership.
These stockholders are 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 like 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 shareholder approval.
Currently there are 2,500 shares of our Convertible Preferred
Stock issued and outstanding. This leaves 4,997,500 shares of
preferred stock available for issuance at the discretion of our
board of directors. These shares, if issued, could contain
dividend, liquidation, conversion, voting or other rights which
could adversely affect the rights of our common shareholders and
which could also be utilized, under some circumstances, as a
method of discouraging, delaying or preventing our change in
control. Provisions of our articles of incorporation, bylaws and
Florida law could make it more difficult for a third party to
acquire us, even if many of our stockholders believe it is in
their best interest.
Item 2. Description of Property.
As of March 31, 2001, our facilities, including our principal
executive offices, a 50,000 square foot building, were located at
1441 SW 29th Avenue, Pompano Beach, FL 33062. The Company
purchased this building in February 1999, and financed it with
a seven year, 7.75% mortgage with a commercial bank in the
original principal amount of $1,680,000. On May 31, 2001, the
Company sold their 50,000 square foot office building, which
houses the Company's principal executive offices and warehouse,
to an unrelated third party. The Company received gross proceeds
of $2,150,000, of which approximately $1,561,000 was used to pay
off the mortgage, and the Company recognized a loss on the sale
of approximately $185,000. The Company then entered into a five-
year term lease agreement for 20,000 of the 50,000 square foot
Pompano Beach office building. On February 22, 2002, the Company
entered into a lease addendum which added approximately 12,000
square feet, effective June 1, 2002, to accommodate the Company's
warehouse expansion. The future minimum annual lease payments as
of March 31, 2003, are as follows: $277,000 for fiscal 2004,
$288,000 for fiscal 2005, $300,000 for fiscal 2006, and $50,000
for fiscal 2007.
Item 3. Legal Proceedings.
Various complaints had been filed with the Florida Board of
Pharmacy. These complaints, the majority of which were filed by
veterinarians who are in competition with the Company for the
sale of pet prescription-required products, alleged violations of
the Pharmacy Practice Act and regulations promulgated thereunder.
The vast majority of the complaints alleged that the Company,
through its pharmacists, improperly dispensed prescription-
required veterinary medication based on prescriptions verified
through the Company's discontinued alternate veterinarian
program. The alternate veterinarian program used a veterinarian
outside the state of Florida to verify prescriptions for certain
pets outside the state of Florida. While the program was not
used for pets residing in the state of Florida, the complaints
had, for the most part, been filed with the Florida Board of
Pharmacy. Other complaints alleged the dispensing of medication
without a valid prescription, the sale of non-conforming products
and that the Company's pharmacy was operating at the same
location as another pharmacy, with which it had a contractual
relationship. The Company contested all allegations and
continued discussions in an attempt to reach a resolution of
these matters.
In February 2002, the Company voluntarily ceased the use of
its alternate veterinarian program, and in March 2002 a business
decision was made to enter into a settlement agreement with the
Florida Board of Pharmacy, rather than to proceed with costly and
lengthy litigation. In April 2002, the Florida Board of Pharmacy
approved the settlement agreement. The Florida Board of Pharmacy
did not reach any finding of fact or conclusion of law that the
Company committed any wrongdoing or violated any rules or laws
governing the practice of pharmacy. According to the settlement
agreement, the Company's pharmacy license was placed on probation
for a period of three years and the Company, the Company's
pharmacists and contracted pharmacy and pharmacist, paid
approximately $120,000 in fines and investigative costs, in July
2002. The Company remains licensed with the State of Florida and
continues to operate its principal business in Florida.
Additional complaints have been filed with other states'
Pharmacy Boards. These complaints, the majority of which were
filed by veterinarians who are in competition with the Company
for the sale of pet prescription-required products, allege
violations of the Pharmacy Practice Act and regulations
promulgated thereunder. The vast majority of the complaints
allege that the Company, through its pharmacists, improperly
dispensed prescription-required veterinary medication based on
prescriptions verified through the Company's alternate
veterinarian program. The Company contested all allegations and
continued discussions in an attempt to reach a resolution of
these matters.
11
In fiscal 2003, the Company reached settlement agreements with
the Louisiana, Missouri, New Mexico, and Ohio State Pharmacy
Boards. According to the settlement agreements, the Company was
required to terminate the alternate veterinarian program in the
state and the Company's permit was placed on probation. As of
March 31, 2003, the Company had paid all fines in full to cover
any or all administrative and investigative costs associated with
these settlements. At March 31, 2003, there was no accrual
relating to these settlements. There can be no assurances made
that other states will not attempt to take similar actions
against the Company in the future.
In February 2000, the United States Environmental Protection
Agency ("EPA") issued a Stop Sale, Use or Removal Order to the
Company regarding the alleged distribution or sale of misbranded
Advantage products in violation of the Federal Insecticide,
Fungicide, and Rodenticide Act ("FIFRA"), as amended. The order
provides that the company shall not distribute, sell, use or
remove the products listed in the order, which are allegedly
misbranded. The order further provides that the Company shall
not commence any sale or distribution of those products without
the prior written approval from the EPA. The Stop Sale, Use or
Removal Order does not assert any claim for monetary damages;
rather, it is in the nature of a cease and desist order. The
Company denied any alleged violations. On February 16, 2000, the
Company submitted a written response to the order. The EPA
assessed a fine in the amount of $445,000. In fiscal 2001 the
Company accrued $445,000 of legal settlement expense.
In September 2001, the Company and the EPA entered into a
Consent Agreement and Final Order ("CAFO"). The settlement
agreement required the Company to pay a civil penalty of $100,000
plus interest, requiring a payment of $56,000, which was paid in
September 2002, and $53,000 due on September 30, 2003, a
reduction from the previously assessed fine of $445,000. For the
purpose of this CAFO, the Company admitted to the jurisdictional
allegations set forth, and neither admitted nor denied the
alleged violations. On September 28, 2001, the CAFO was approved
and ordered by the regional judicial officer. Accordingly, a
gain of $345,000 was reflected in the statement of income for the
year ended March 31, 2002, to reflect the adjustment to this
settlement.
On March 19, 2002, Novartis Animal Health U.S., Inc.
("Novartis") filed a complaint against the Company and two other
defendants in U.S. District Court for the Southern District of
Florida. Novartis purports to assert seven claims related to the
Company's alleged sale of pet medications produced for a Novartis
Australian sister company: Count I: Infringement of Registered
Trademark Under Section 32 of the Lanham Act, 15 U.S.C. 1114;
Count II: Infringement of Unregistered Trademarks Under Section
43(a) of the Lanham Act, 15 U.S.C. 1125(a); Count III: False
Advertising Under Section 43(a) of the Lanham act, 15 U.S.C.
1125(a); Count IV: Misleading Advertising Under Florida Statutory
Law; Count V: Deceptive and Unfair Trade Practices Under Florida
Statutory Law; Count VI: Injury to Business Reputation Under
Florida Statutory Law; Count VII: Common Law Unfair Competition.
Subsequent to the year ended March 31, 2003, the Company reached
a final settlement agreement with Novartis. According to the
confidential settlement agreement dated April 7, 2003, the
Company has satisfactorily resolved the contested issues raised
by the complaint and the confidential settlement terms will not
have a material impact on the Company's operations and financial
results.
The Company is a defendant in a lawsuit in Texas state
district court seeking injunctive and monetary relief styled
Texas State Board of Pharmacy and State Board of Veterinary
Medical Examiners v. PetMed Express, Inc. Cause No.GN-202514, in
the 201st Judicial District Court, Travis County, Texas, which
was filed in August 2002. The Company in its initial pleading
denied the allegations contained therein. The Company will
vigorously defend, is confident of its compliance with the
applicable law, and finds wrong-on-the-facts the vast majority of
the allegations contained in the Plaintiffs' supporting
documentation attached to the lawsuit. Discovery has recently
commenced. At this early stage of the litigation it is difficult
to assess any possible outcome or estimate any potential loss in
the event of an adverse outcome.
Routine Proceedings
-------------------
The Company is a party to routine litigation incidental to its
business. Management does not believe that the resolution of any
or all of such routine litigation is likely to have a material
adverse effect on the Company's financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of our shareholders during
the fourth quarter of the fiscal year ended March 31, 2003.
12
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters.
The Company's common shares are traded on the OTC Bulletin
Board ("OTCBB") under the symbol "PETS". The prices set forth
below reflect the range of high and low closing prices per share
in each of the quarters of fiscal 2003 and 2002 as reported by
the OTCBB.
High Low
Fiscal 2003:
First Quarter $1.75 $0.76
Second Quarter $2.53 $1.75
Third Quarter $2.30 $1.57
Fourth Quarter $2.36 $1.78
Fiscal 2002:
First Quarter $2.11 $0.88
Second Quarter $1.45 $0.64
Third Quarter $1.15 $0.65
Fourth Quarter $1.25 $0.76
There were 68 holders of record of our common stock at May 31,
2003, and we estimate there were approximately 950 beneficial
shareholders on that date. The closing sales price for the
common stock on June 13, 2003 as reported on the OTCBB was
$4.00 per share. In October 2002, the Company submitted an
application for listing on the American Stock Exchange ("AMEX").
In June 2003, the Company's Board of Directors decided to
withdraw its application for listing on the AMEX, while all other
options are explored, which includes reapplying to the AMEX for
listing at a later date. No assurances can be made that the
Company will qualify or be accepted for listing on a major
exchange.
A special note about penny stock rules
The Company's common stock is covered by an SEC rule that
imposes additional sales practice requirements on broker-dealers
who sell such securities to persons other than established
customers and accredited investors, which are generally
institutions with assets in excess of $5,000,000, or individuals
with net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse. For transactions
covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and transaction prior
to the sale. Consequently, the rule may affect the ability of
broker-dealers to sell our securities, and also may affect the
ability of purchasers of our stock to sell their shares in the
secondary market. It may also cause less broker-dealers to be
willing to make a market in our common stock, and it may affect
the level of news coverage we receive.
Recent Sales of Unregistered Securities
In April 2002, we issued 300,000 shares of the Company's common
stock to our president upon the exercise of options at an
exercise price of $.16 per share. These 300,000 shares were
subsequently registered for resale under the August 2, 2002 Form
SB-2. Additionally, in April 2002, we issued 300,000 shares of
the Company's common stock to one individual upon the exercise
of options at an exercise price of $.37 per share.
In June 2002, we issued 10,500 shares of the Company's common
stock to one individual upon the exercise of options at an
exercise price of $1.25 per share. These 10,500 shares were
subsequently registered for resale under the August 2, 2002 Form
SB-2.
In July 2002, we issued 12,500 shares of the Company's common
stock to two individuals upon the exercise of options at an
exercise price of $.20 per share.
In May 2003, we issued 12,500 shares of the Company's common
stock to one individual upon the exercise of options at an
exercise price of $.20 per share.
All of these issuances were made in reliance on an exemption
from registration under the Securities Act of 1933 in reliance on
Section 4(2) thereof. There were no underwriters involved in any
of these issuances and we did not pay any commissions. In each of
the foregoing transactions, the recipients were either accredited
investors or non-accredited investors who had such knowledge and
experience in financial, investment and business matters that
they were capable of evaluating the merits and risks of the
prospective investment in our securities. No general solicitation
or advertising was used in connection with these transactions,
the participants had access to business and financial information
concerning our company, and the certificates that were issued
representing these shares bore the appropriate legend restricting
their transfer absent registration of such shares under the
Securities Act of 1933, as amended.
13
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.
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, 2003:
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 2,639,600 $ 1.06 2,360,400
Equity compensation plans not
approved by security holders(1) 91,500 $ 1.33 -
----------- ------------
Total 2,731,100 2,360,400
=========== ============
(1) Represents non-plan options to purchase an aggregate of
91,500 shares of our common stock issued to a member of
our management.
14
Item 6. Management's Discussion and Analysis or Plan of
Operation.
Overview
--------
PetMed Express was incorporated in the state of Florida in
January 1996. The Company began selling pet medications and
products in September 1996, and in the fall of 1997 we issued our
first catalog. This catalog displayed approximately 1,200 items,
including prescription and non-prescription pet medications, pet
health and nutritional supplements and pet accessories. In
fiscal 2001, the Company focused its product line to
approximately 600 of the most popular pet medications for dogs
and cats. The Company also markets products on its web site,
where we currently generate approximately 50% of all sales, over
the previous 12 months we generated 44% of all sales. Since
October 1997, the Company has advertised its products on national
television and through the direct mailing of catalogs and
postcards.
The Company's sales consist of products sold to mainly retail
consumers and minimal wholesale customers. Typically, the
Company's retail 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 for 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. For the fiscal year ended March 31, 2003, the
Company's sales returns average was approximately 1.6% of sales,
and the average purchase was approximately $71.
The following should be read in conjunction with the Company's
Consolidated Financial Statements and the related notes thereto
included elsewhere herein.
Results of Operations
---------------------
The following table sets forth, as a percentage of sales,
certain items appearing in the Company's statements of income.
Fiscal Year
--------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
Net sales 100.0 % 100.0 %
Cost of sales 57.3 59.0
-------------- --------------
Gross profit 42.7 41.0
-------------- --------------
Operating expenses:
General and administrative 14.5 19.0
Advertising 21.2 17.9
Severance charges - 0.6
Depreciation and amortization 0.7 1.2
-------------- --------------
Total operating expenses 36.4 38.7
-------------- --------------
Income from operations 6.3 2.3
-------------- --------------
Other income (expense):
Adjustment of estimate for legal
settlement - 1.1
Gain (loss) on disposal of property
and equipment 0.1 (1.0)
Interest expense (0.1) (0.1)
Interest income - 0.1
Other, net - 0.2
-------------- --------------
Total other income (expense): - 0.3
-------------- --------------
Income before provision for income taxes 6.3 2.6
Provision for income taxes 0.4 -
-------------- --------------
Net income 5.9 2.6
============== ==============
15
Fiscal 2003 Compared to 2002
Sales
-----
Sales increased by approximately $22,949,000, or 71.7%, to
approximately $54,975,000 for the fiscal year ended March 31,
2003, from approximately $32,026,000 for the fiscal year ended
March 31, 2002. The increase in sales was primarily attributable
to the positive effects of increased advertising and increased
retail reorders, partially offset by a decrease in wholesale
sales. Advertising as a percentage of sales increased to 21.2%
in fiscal 2003 from 17.9% in fiscal 2002. The Company has
committed certain amounts specifically designated towards
television advertising to stimulate sales, create brand
awareness, and acquire new customers. Retail new order sales
have increased by approximately $10,143,000, or 54.0%, to
approximately $28,915,000 for the fiscal year ended March 31,
2003, from approximately $18,772,000 for the fiscal year ended
March 31, 2002. Retail reorder sales have increased by
approximately $15,575,000, or 151.9%, to approximately
$25,827,000 for the fiscal year ended March 31, 2003, from
approximately $10,252,000 for the fiscal year ended March 31,
2002. Wholesale sales have decreased by approximately
$2,769,000, or 92.3%, to approximately $233,000 for the fiscal
year ended March 31, 2003, from approximately $3,002,000 for the
fiscal year ended March 31, 2002. The Company has discontinued
its wholesale operations to concentrate on retail sales.
The majority of our product sales are affected by the seasons,
due to the seasonality of mainly heartworm and flea and tick
medications. Industry seasonality trends, according to Fountain
Agricounsel LLC, Management Consultants to Agribusiness, are
divided into percentage of industry sales by quarter. For the
quarters ended March 31, June 30, September 30, and December 31
industry sales are 19%, 37%, 28%, and 16%, respectively. The
Company cannot accurately predict 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 2004.
Cost of sales
-------------
Cost of sales increased by approximately $12,623,000, or 66.8%,
to approximately $31,518,000 for the fiscal year ended March 31,
2003, from approximately $18,895,000 for the fiscal year ended
March 31, 2002. The increase in cost of sales is directly
related to the increase in retail sales in fiscal 2003 as
compared to 2002. However, as a percent of sales, the cost of
sales was 57.3% in fiscal 2003, as compared to 59.0% in fiscal
2002. This percentage reduction can be attributed to the
Company's continued efforts to purchase medications in larger
quantities, by bulk, to take advantage of any and all purchasing
discounts available.
Gross profit
------------
Gross profit increased by approximately $10,326,000, or 78.6%,
to approximately $23,457,000 for the fiscal year ended March 31,
2003 from approximately $13,131,000 for the fiscal year ended
March 31, 2002. Gross profit as a percentage of sales for fiscal
2003 and 2002 was 42.7% and 41.0%, respectively, reflecting the
positive impact of purchasing medications in larger quantities,
receiving purchasing discounts. In February 2003, the Company
initiated a free shipping program on all orders exceeding $40 in
total. The Company expects increased sales from this free
shipping promotion, however, this promotion will reduce the
Company's gross profit percentage in the first quarter of fiscal
2004.
General and administrative expenses
-----------------------------------
General and administrative expense increased by approximately
$1,862,000, or 30.6%, to approximately $7,957,000 for the fiscal
year ended March 31, 2003 from approximately $6,095,000 for the
fiscal year ended March 31, 2002. General and administrative
expense as a percentage of sales was 14.5% and 19.0% for the
fiscal years ended March 31, 2003 and 2002, respectively. The
increase in general and administrative expense for the year ended
March 31, 2003 is primarily due to the following: a $1,428,000
increase to payroll expenses which can be attributed to the
addition of new employees in the customer service and pharmacy
departments, which enabled the company to sustain its continued
growth, a $493,000 increase to bank service and credit card fees
which is directly related to the increase in fiscal 2003 sales,
the $250,000 increase in property and insurance expenses, which
includes utilities and rental expenses, can be attributed to
leasing additional space to support our expansion in fiscal 2003,
offset with a $285,000 decrease to professional fees and a
$24,000 decrease to various other expenses.
Advertising expenses
--------------------
Advertising expenses increased by approximately $5,933,000, or
approximately 103.8%, to approximately $11,650,000 for the fiscal
year ended March 31, 2003 from approximately $5,717,000 for the
fiscal year ended March 31, 2002. The significant increase in
advertising expense for the fiscal year ended March 31, 2003 was
due to the Company's plan to commit certain amounts specifically
designated towards television advertising to stimulate sales,
create brand awareness, and acquire new customers. The Company
expects this trend in advertising to continue into the first and
second quarters of 2004.
Severance charges
-----------------
Severance charges for the fiscal year ended March 31, 2002 of
$195,000 relate to severance due to two former executive
officers, the CFO and COO, of the Company. No comparable charges
were made in fiscal 2003.
16
Depreciation and amortization
-----------------------------
Depreciation and amortization decreased by approximately
$9,000, or 2.4%, to approximately $368,000 for the fiscal year
ended March 31, 2003 from approximately $377,000 for the fiscal
year ended March 31, 2002. The slight decrease to depreciation
and amortization expense for fiscal 2003 can be attributed to a
depreciation expense reduction related to the sale of our
facilities in fiscal 2002, offset by an increase to property
additions in fiscal 2003.
Adjustment of estimate for legal settlement
-------------------------------------------
In fiscal 2002, the Company recognized income of $345,000 on a
reversal of a legal assessment estimate, which was originally
booked in the fiscal year ended March 31, 2001. On September 28,
2001, the Company and the EPA entered into a Consent Agreement
and Final Order. The settlement agreement required the Company
to pay a civil penalty of $100,000 plus interest, a reduction
from the original $445,000 fine.
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. During fiscal 2002, the
Company recorded a loss on disposal of land and building of
$314,000. An $185,000 loss was the result of the sale of the
corporate office building, which includes the principal executive
offices and warehouse, to an unrelated third party. The Company
received gross proceeds of $2,150,000, of which approximately
$1,561,000 was used to pay off the mortgage. The remaining
$129,000 loss relates to the impairment of outdated computer
equipment, which was no longer utilized by the company.
Interest Expense
----------------
Interest expense decreased by approximately $18,000, or 37.2%,
to approximately $31,000 for the fiscal year ended March 31, 2003
from approximately $49,000 for the fiscal year ended March 31,
2002. The $18,000 decrease can be attributed to a reduction in
interest expense relating to the mortgage payoff of the Company's
principal executive offices in the first quarter of fiscal 2002.
Interest expense may increase further in future quarters, due to
the Company's plan to utilize its $2,000,000 line of credit to
increase inventory levels during promotion periods.
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. 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, 2003 and
2002, the Company recorded an income tax provision for
approximately $223,000 and $0, respectively. There was no income
tax provision for fiscal 2002, due to the utilization of prior
net operating losses which offset taxable income for the period.
The effective tax rate for fiscal 2003 of 6.4% is lower than the
federal tax rate of 34%, this is primarily due to the recognition
of the deferred tax asset. Upon recognition of the $581,000
deferred income tax asset, 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 $2,433,000, or 294.7%, to
$3,258,000 net income for the fiscal year ended March 31, 2003
from $825,000 net income for the fiscal year ended March 31,
2002. The significant increase was mainly attributable to the
Company's profitable operations and the recognition of a deferred
tax asset of $581,000.
Liquidity and Capital Resources
The Company's working capital at March 31, 2003 was
$3,018,000, as compared to the $691,000 at March 31, 2002, an
increase of approximately $2,327,000. The increase in working
capital was primarily attributable to the profitable operations
of the Company which resulted in net cash provided by operating
activities of $970,000 and $476,000 for the years ended March 31,
2003 and 2002, respectively. Net cash used in investing
activities was $1,095,000 for the year ended March 31, 2003 as
compared to net cash provided by investing activities of
$1,461,000 for the year ended March 31, 2002, primarily as a
result of increased property and intangible asset additions in
fiscal 2003, compared to the proceeds received from the sale of
the corporate office building and land in fiscal 2002. Net cash
provided by financing activities increased to $371,000 for the
year ended March 31, 2003, as compared to net cash used in
financing activities of $1,609,000 for the year ended March 31,
2002. This increase relates directly to proceeds received upon
the exercise of stock options and warrants offset by repayment of
the line of credit in fiscal 2003, as compared to the
satisfaction of the mortgage in fiscal 2002.
17
Since inception, the Company has primarily funded its growth
through the private placement of securities. In April 1998, the
Company raised an additional $888,000 of net proceeds from the
private placement of 250,000 shares of Convertible Preferred
Stock. In February 1999, the Company raised approximately
$819,000 of net proceeds from the sale of 330,333 shares of
common stock. In November 2000 the Company raised $2,000,000
from the private placement of 10,000,000 shares of equity
securities. The Company had financed certain equipment
acquisitions with capital leases, as of March 31, 2003 the
Company had no outstanding lease commitments.
On May 31, 2001, the Company sold their 50,000 square foot
office building, which houses the Company's principal executive
offices and warehouse, to an unrelated third party. The Company
received gross proceeds of $2,150,000, of which approximately
$1,561,000 was used to pay off the mortgage, and the Company
recognized a loss on the sale of approximately $185,000. The
Company then entered into a five-year term lease agreement for
20,000 of the 50,000 square foot Pompano Beach office building.
On February 22, 2002, the Company entered into a lease addendum
which added approximately 12,000 square feet, effective June 1,
2002, to accommodate the Company's warehouse expansion.
On July 22, 2002, the Company executed an agreement which
increased the line of credit from $150,000 to $1,000,000. On
March 18, 2003, the Company increased the line of credit
agreement from $1,000,000 to $2,000,000, effective through July
22, 2004. The interest rate is at the published thirty day
London Interbank Offered Rates ("LIBOR") plus 2.65% (3.92% at
March 31, 2003), and contains various financial and operating
covenants. At March 31, 2003, there was no outstanding balance
under the line of credit agreement.
On March 12, 2002, the Company entered into a $205,000, three
year term loan agreement with a bank, with interest accruing at
the lending institution's base rate plus 1% (5.25% at March 31,
2003). The loan proceeds were used to purchase a $250,000
computer server. The aggregate loan maturities are $68,000 per
year for three years. The line of credit and the term loan are
secured by substantially all of the Company's assets.
Presently, the Company has approximately $650,000 planned for
capital expenditure commitments to further the Company's growth
and the addition of backup computer equipment to sustain business
during an outage, during fiscal 2004, which will be funded
through cash from operations. Other than working capital and
credit line, the Company presently has no other alternative
source of working capital. For the year ended March 31, 2001,
the Company had incurred significant operating losses and cash
flow deficiencies. However, for the year ended March 31, 2003
and 2002 the Company had net income of $3,258,000 and $825,000,
and has sustained profitability for seven consecutive quarters.
The Company may seek 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. At this time, the Company has no commitments or plans
to obtain additional capital. 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
The Company does not believe that any recently issued, but not
yet effective, accounting standards, if currently adopted, will
have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
Item 7. Financial Statements.
The financial statements of the Company and the related notes
are set forth at pages F-1 through F-16 attached hereto.
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.
On January 22, 2001, PetMed appointed Lopez Levi & Associates,
LLC, as its independent auditor and Lopez Levi & Associates, LLC
accepted such appointment. PetMed has not consulted with Lopez
Levi & Associates, LLC on the application of accounting
principles to any completed or proposed transaction or on the
type of audit opinion that might be given. On April 24, 2001,
the Company terminated the engagement of Lopez Levi & Associates,
LLC as the Company's independent auditor. There have been no
disagreements with Lopez Levi & Associates, LLC on any matters of
accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of Lopez Levi & Associates, LLC,
would have caused Lopez Levi & Associates, LLC to make reference
to the matter in their report on PetMed's financial statements.
On April 24, 2001, PetMed appointed Goldstein Golub Kessler
LLP as its independent auditor and Goldstein Golub Kessler LLP
accepted such appointment. PetMed had not consulted with
Goldstein Golub Kessler LLP prior to their engagement as our
independent auditors, on the application of accounting principles
to any completed or proposed transaction or on the type of audit
opinion that might be given. The decision to change audit firms
was approved by our Board of Directors.
18
PART III
Item 9. Directors, Executive Officers, Promoters, and Control
Persons; Compliance with Section 16(a) of the Exchange
Act.
Set forth below is information regarding the board of directors
and executive officers of the Company:
Name Office Age
----------------------- --------------------------------- ---
Marc A. Puleo, M.D. Chairman of the Board,
President and Corporate Secretary 40
Menderes Akdag Chief Executive Officer 42
Bruce S. Rosenbloom Chief Financial Officer and 34
Treasurer
Guven Kivilcim Director 30
Robert C. Schweitzer Director 56
Ronald J. Korn Director 63
Gian Fulgoni Director 55
MARC PULEO, M.D., age 40, has served as Chairman of our Board
of Directors since our inception in January 1996. From January
1996 until March 2000, Dr. Puleo also served as our President,
from January 1996 until March 2001, Dr. Puleo served as our Chief
Executive Officer, from January 1996 until May 2000, and Dr.
Puleo served as our Treasurer from January 1996 to May 2001. Dr.
Puleo has also been the President of South Florida Anesthesia
Professionals, an entity located in Fort Lauderdale, Florida,
since founding that company in January 1996. Dr. Puleo was Vice
President of Dynamic Press, Inc., an offset printing and direct
marketing company, from June 1997 until June 1998. Dr. Puleo, an
anesthesiologist, was employed with Anesthesia Professional
Association, North Ridge Medical Center and North Ridge
Outpatient Surgery Center from December 1994 through December
1995. Dr. Puleo was an anesthesia resident with the University
of Illinois Hospitals and Clinics, the Michael Reese Hospital,
the Westside Veteran's Administration Hospital, the University of
Illinois Eye and Ear Infirmary, the Nathan Cummings Surgicenter,
and the University of Illinois Pain Clinic, all located in the
Chicago, Illinois area, from July 1991 through June 1994.
Dr. Puleo received his medical degree from the University of
Illinois College of Medicine, Chicago, Illinois.
MENDERES AKDAG, age 42, was appointed Chief Executive Officer
on March 16, 2001. Prior to joining PetMed Express, from
November 2000 until March 2001, Mr. Akdag served as Chief
Executive Officer of International Cosmetics Marketing Co. d/b/a
Beverly Sassoon & Co., a publicly held (OTCBB: ICMK) direct sales
company distributing skin care and nutritional products. From
May 1991 until August 2000, Mr. Akdag was employed by Lens
Express, Inc., a direct sales company distributing replacement
contact lenses, serving as its President from May 1996 until
August 2000, Chief Executive officer and a member of the Board of
Directors from August 1992 until May 1996, and Chief Financial
Officer and a member of the Board of Directors from May 1991
until August 1992. On December 14, 1998, Netel Inc., a
corporation in which Mr. Akdag served as a member of the Board of
Directors, filed a Petition for Chapter 11 bankruptcy in the
United States Bankruptcy Court Southern District of Florida. The
proceeding was styled IN RE: NETEL, INC., CASE NO. 98-28929-BKC-
PGH. On July 19, 1999, the Bankruptcy Court entered an Order
Confirming an Amended Chapter 11 Plan. On December 21, 1999, the
Bankruptcy Court entered a Final Decree, Discharge of Trustee,
and closed the case. Mr. Akdag holds a Bachelor of Science
degree in Business Administration with a major in finance from
the University of Florida where he graduated with high honors.
BRUCE ROSENBLOOM, age 34, was appointed Chief Financial Officer
on May 30, 2001. Mr. Rosenbloom served as the Manager of Finance
and Financial Reporting of Cooker Restaurant Corporation, a $147
million, 65 location, publicly held (OTCBB: CGRT) restaurant, in
West Palm Beach, Florida, from December 2000 until May 2001. Mr.
Rosenbloom's duties included all internal and external reporting
including all SEC filings and Annual Report to Shareholders. Mr.
Rosenbloom was a senior audit accountant for Deloitte & Touche
LLP, an international accounting firm, West Palm Beach, Florida,
from January 1996 until December 2000. Mr. Rosenbloom was
responsible for planning and conducting all aspects of audit
engagements for clients in various industries, including direct
marketing, healthcare, manufacturing, financial institutions, and
professional service firms. From August of 1992 to May of 1995,
Mr. Rosenbloom was an Account Executive for MCI
Telecommunications. Mr. Rosenbloom, a certified public
accountant, received a Bachelor of Science degree in Accounting
from Florida Atlantic University, Boca Raton, Florida in 1996 and
a Bachelor of Arts degree in Economics from the University of
Texas, Austin, Texas in 1992.
GUVEN KIVILCIM, age 30, has been a member of our Board of
Directors since November 2000. Since December 1997, Mr. Kivilcim
has been President and Director of Radiant Telecom, Inc., a long
distance telecommunications company. Mr. Kivilcim is a member of
Tricon Holdings, LLC, which is the principal shareholder of the
Company. From 1995 to present, Mr. Kivilcim has been employed as
a Vice President with Tel3.com and a managing member of
Intelligent Switching and Software, Inc., long distance
telecommunications companies. Mr. Kivilcim is also Secretary and
Treasurer of Next Communications, Inc. and Secretary and Director
of Ntera, Inc.
ROBERT C. SCHWEITZER, age 56, was the Regional President of
Union Planters Bank for Broward and Palm Beach County Florida
markets from April 1999 to December 2002. Prior to joining Union
Planters, Mr. Schweitzer served as the Executive VP and Head of
Commercial Banking for Barnett Bank/NationsBank in Jacksonville,
Florida from 1993 to 1999. Other positions held include Director
and Head of Real Estate Consulting for Coopers & Lybrand in
Washington, D.C.; Senior VP and Manager of Central North America
Real Estate for the First National Bank of Chicago, and Manager
of Domestic Credit Process Review; Senior VP & Manager of Central
North American Banking for Wachovia Bank. Mr. Schweitzer holds
an MBA from the University of North Carolina, and a Bachelor of
Science degree from the United States Naval Academy.
19
RONALD J. KORN, age 63, has been the President of Ronald Korn
Consulting, a business consulting firm, since 1991. He served as
the Managing Partner of KPMG, LLP's Miami office from 1985 to
1991. Mr. Korn held various positions including Partner with
KPMG, an international accounting firm, from 1961 until 1991. He
has served as a Director of TOUSA Homes, Inc. (formerly Engle
Homes, Inc.) since 1992, and a Director, Chairman of the Audit
Committee, and member of the Loan Committee of Horizon Bank, FSB
since 1999. Mr. Korn previously served as a Director and Chairman
of the Audit Committee of Vacation Break U.S.A., Inc. and
Magicworks Entertainment Corporation, and Non-Executive Chairman
of Carole Korn Interiors, Inc. Mr. Korn holds a Juris Doctor
degree from the New York University Law School and a Bachelor of
Science degree in Economics from the University of Pennsylvania,
Wharton School.
GIAN FULGONI, age 55, has been the Executive Chairman of
ComScore Networks, Inc. since 1999. From 1981 until 1998, Mr.
Fulgoni served as president and chief executive officer of
Information Resources, Inc. (IRIC: NASDAQ). He was a member of
our Board of Directors from August 1999 through November 2000.
Mr. Fulgoni currently serves as a member of the Board of
Directors of Easter Seals, Chicago. Mr. Fulgoni served on the
Board of Directors of Platinum Technology, Inc. from 1990 to
1999, U.S. Robotics, Inc. from 1991 to 1994, and Yesmail.com,
Inc. in 1999. Educated in the U.K., Mr. Fulgoni holds a Masters
degree in Marketing from the University of Lancaster and a
Bachelor of Science degree in Physics from the University of
Manchester.
On November 13, 2002, Messrs. Kenneth Jacobi and Huseyin
Kizanlikli, members of the Board of Directors of the Company
resigned. The resignations were not related to a disagreement
with the Company on any matter related to the Company's
operations, policies or practices. On November 14, 2002 through
November 19, 2002, the Company appointed four new board members
to its Board of Directors. Joining the Company's Board of
Directors are Messrs. Robert C. Schweitzer, Ronald J. Korn, Gian
Fulgoni, and the Company's Chief Executive Officer, Menderes
Akdag. Each independent Board of Director will be compensated
$10,000 annually, and were granted 30,000 stock options, at an
exercise price of $1.90 per share, to purchase the Company's
Common Stock, which will vest equally over a three year period.
There are no familial relationships between any of the
executive officers and directors, however, Mr. Kivilcim is the
nephew of the majority shareholder, Mustafa Yesil, who owns
Tricon Holdings, LLC. Each director is elected at our annual
meeting of shareholders and holds office until the next annual
meeting of our shareholders, or until his or her successor is
elected and qualified. The bylaws permit the board of directors
to fill any vacancy and that director may serve until the next
annual meeting of stockholders or until his successor is elected
and qualified.
Committees of the Board of Directors
The Board of Directors has established an audit committee and
a compensation committee, both of which are comprised of non-
employee independent directors. The compensation committee
establishes guidelines and standards relating to the
determination of executive compensation, reviews executive
compensation policies and recommends to our board of directors
compensation for our executive officers and other employees. Our
compensation committee also administers our stock incentive plan
and determines the number of shares covered by, and terms of,
options to be granted to executive officers and other employees
under this plan.
The audit committee recommends independent auditors, reviews
internal financial information, reviews audit reports and
management letters, participates in the determination of the
adequacy of the internal accounting control system, reviews the
results of audits with independent auditors, oversees quarterly
and yearly reporting, and is responsible for policies,
procedures, and other matters relating to business integrity,
ethics and conflicts of interests. The members of the
compensation and audit committees are Messrs. Schweitzer, Korn,
and Fulgoni.
Compliance With Section 16(a) of the Exchange Act
We became a reporting company under the Securities Exchange
Act of 1934 (the "Exchange Act") in March 2000. Based solely
upon a review of Forms 3 and 4 and amendments thereto furnished
to us under Rule 16a-3(d) of the Securities Exchange Act of 1934
("Exchange Act") through the fiscal year ended March 31, 2003,
the Company is not aware of any person that failed to file on a
timely basis, as disclosed in the aforementioned forms, reports
required by Section 16(a) of the Exchange Act during the fiscal
year ended March 31, 2003, except as follows:
* Tricon Holdings, LLC, ("Tricon") our majority shareholder,
failed to file a Form 4 for exercising the right to
2,500,000 shares of our common stock in each of the three
months, December 2000, January 2001, and February 2001.
Additionally, Tricon failed to file a Form 4 for the
distribution of 1,860,000 shares of our common stock and
540,000 warrants in November 2002 to the indirect
beneficial owner, Guven
Kivilcim, a director of the Company. Such delinquent
reports were subsequently filed.
* Guven Kivilcim, a director of the Company, failed to file
a Form 4 for receiving the distribution of 1,860,000
shares of our common stock and 540,000 warrants from
Tricon in November 2002. Additionally, Mr. Kivilcim
failed to file a Form 4 for exercising the right to
500,000 shares of our common stock in each of the three
months, December 2000, January 2001, and February 2001,
reflecting the indirect ownership of Tricon. Also, Mr.
Kivilcim failed to file a Form 4 for his purchase of
11,000 shares of our common stock in March 2001 and his
spouse's purchase of a total of 26,000 shares of our
common stock in March, August, and September 2001. Such
delinquent reports were subsequently filed.
20
* Creslin Limited, ("Creslin"), our majority shareholder who
holds and controls Tricon, failed to file a Form 4 for
exercising the right to 2,000,000 shares of our common
stock in each of the three months, December 2000, January
2001, and February 2001, reflecting the indirect ownership
of Tricon. Additionally, Creslin failed to file a Form 4
for the following: the sale of 500,000 shares of our
common stock by Tricon in September 2002, the issuance of
300,000 shares of our common stock upon the exercise of
stock options by Tricon in September 2002, the sale of
225,000 shares of our common stock by Tricon in October
2002, the distribution of 1,860,000 shares of our common
stock and 540,000 warrants in November 2002 to the
indirect beneficial owner, Guven Kivilcim, a director of
the Company, the sale of 125,000 shares of our common
stock by Tricon in March 2003, the sale of 200,000 shares
of our common stock by Tricon in June 2003, reflecting the
indirect ownership of Tricon. Such delinquent reports
were subsequently filed.
* Marc Puleo, the Company's president, failed to file a Form
4 upon the grant of 600,000 options to purchase the
Company's common stock in May 2000. This delinquent
report was subsequently filed.
Item 10. Executive Compensation.
The following table sets forth the annual and long-term
compensation paid by us for services performed on our behalf for
the last three completed fiscal years ended March 31, 2003, 2002
and 2001, with respect to our chief executive officer and other
executive officers serving as such who earned compensation
greater than $100,000 in these fiscal years:
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
---------------------------- -------------------------------
Awards Payouts
Other Securities All Other
Annual Underlying LTIP Compen-
Name and Compen- Options/ Payouts sation
Principal Position Year Salary Bonus sation ($) SARs (#) ($) ($)
------------------------ ---- ------- ------ ---------- ---------- ------- ---------
Marc Puleo, M.D., 2003 $ 100,000 50,000 - 240,000 - -
Chairman of the Board 2002 88,462 - - - - -
President 2001 85,000 15,000 - 200,000 - -
Menderes Akdag, 2003 200,000 - - - - -
Chief Executive Officer 2002 176,923 - - - - -
2001 6,000 - - 750,000 - -
Bruce S. Rosenbloom, 2003 100,000 500 - - - -
Chief Financial Officer 2002 77,962 - - 75,000 - -
2001 - - - - - -
Employment Agreements
On March 16, 2001, the Company entered into an employment
agreement with Menderes Akdag to serve as the Company's Chief
Executive Officer. Under the terms of this three-year agreement
the Company will pay Mr. Akdag an annual salary of $150,000 for
the first six months of the agreement, and thereafter his annual
salary will be increased to $200,000. The Company can terminate
the employment of Mr. Akdag either upon mutual consent or for
cause. If the Company should terminate Mr. Akdag for cause, or
if Mr. Akdag should terminate the agreement without "good reason"
as described in the employment agreement, no severance benefits
shall be paid. If the Company should terminate Mr. Akdag without
cause, the Company must give Mr. Akdag three months notice and
continue to compensate him under the terms of this employment
agreement during those three months. At the end of the three-
month period, the Company must pay Mr. Akdag severance benefits
equal to the annual base salary of the executive, and any
previously granted but unvested options shall immediately vest.
The agreement can be terminated upon the mutual consent of the
parties, or upon 90 days notice by the Company during which time
the Company shall continue to compensate him under the terms of
his employment agreement. The Company also granted Mr. Akdag
options to purchase 750,000 shares of its common stock under the
Company's 1998 Stock Option Plan at an exercise price of $.32 per
share, which vest at the rate of 187,500 options on each of March
16, 2001, 2002, 2003 and 2004, exercisable for a period of three
years from the date of vesting. The employment agreement
contains customary non-disclosure provisions, as well as a non-
competition restriction for a period of 18 months following the
termination of the agreement.
21
On May 1, 2000, the Company entered into a two-year
employment agreement with Marc Puleo, M.D., as Chief Executive
Officer, which provided for annual cash compensation to him of
$150,000. On November 8, 2000, Dr. Puleo's employment agreement
dated May 1, 2000 was amended to reflect a salary of $75,000
annually. Under the terms of the employment agreement Dr. Puleo
received an annual salary of $75,000, subject to increase no less
frequent than an annual review by our board of directors. Dr.
Puleo's salary was increased to $100,000 in Fiscal 2002, and
than increased to $150,000 in May 2003. The Company can terminate
the employment of Dr. Puleo either upon mutual consent or for
cause. If the Company should terminate Dr. Puleo for cause, or
if Dr. Puleo should terminate the agreement without "good reason"
as described in the employment agreement, no severance benefits
shall be paid. If the Company should terminate Dr. Puleo without
cause, the Company must give Dr. Puleo three months notice and
continue to compensate him under the terms of this employment
agreement during those three months. At the end of the three-
month period, the Company must pay Dr. Puleo severance benefits
equal to the annual base salary of the executive, and any
previously granted but unvested options shall immediately vest.
If the Company should terminate Dr. Puleo for cause, as defined
in employment agreement, no severance benefits shall be paid.
The agreement can be terminated upon the mutual consent of the
parties, or upon 90 days notice by the Company during which time
the Company shall continue to compensate him under the terms of
his employment agreement, or his contract will renew annually.
Stock Options
-------------
Non-Plan Options Agreements
As of June 13, 2003, options to purchase 91,500 shares of our
common stock, at an exercise price of $1.33 per share, was
outstanding.
1998 Stock Option Plan
The Plan, adopted July 1998, provides for the grant of options
to purchase up to 5 million shares to key employees, including
officers, and to non-employee directors and consultants. The
purpose of this plan is to attract and retain persons eligible to
participate in the plan, motivate participants to achieve our
long-term goals by further aligning the interests of participants
with those of our stockholders through compensation that is
directly linked to the profitability of our business and
increases in stockholder value. These options are intended to
qualify either as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code, or as non-statutory
stock options, which are options that are not intended to meet
the requirements of that section of the Internal Revenue Code.
The plan is administered by the compensation committee. Under
the plan, our compensation committee has the authority to
determine: the persons to whom options will be granted, the
number of shares to be covered by each option, exercise price of
each option, whether the options granted are intended to be
incentive stock options, the manner of exercise, and the time,
manner and form of payment upon exercise of an option.
Incentive stock options granted under the plan may not be
granted at a price less than the fair market value of our common
stock on the date of grant (or less than 110% of the fair market
value in the case of employees holding 10% or more of our voting
stock). Non-statutory options may be granted at an exercise price
established by our board of directors, but cannot be less than
par value per share ($.001) of our common stock. Incentive stock
options granted under the plan must expire not more than 10 years
from the date of grant, and not more than five years from the
date of grant in the case of incentive options granted to an
employee who holds 10% or more of our voting stock.
As of June 13, 2003, options to purchase 2,158,434 shares of
our common stock, at exercise prices ranging from $.32 to $4.50
per share, were outstanding under the Plan.
The following table sets forth certain information concerning
grants of options to the Named Executive Officers during the
fiscal year ended March 31, 2003.
22
OPTION GRANTS FOR FISCAL YEAR ENDED MARCH 31, 2003
Individual Grants
Number of Percent of
Securities Total Options
Underlying granted Exercise or
Options Granted to Employees Base Price Expiration
Name (shares) in Fiscal Year ($/share) Date
------------------- ----------------- -------------- ------------ ------------
Marc Puleo, M.D. 240,000 (a) 100% $ 1.05 May 20, 2006
Menderes Akdag - (b) - - -
Bruce S. Rosenbloom - (b) - - -
(a) The Company granted Mr. Puleo options to purchase 240,000
shares of its common stock on May 20, 2002, under the Company's
1998 Stock Option Plan: 240,000 options at an exercise price of
$1.05 per share which vest at the rate of 80,000 options on each
of May 20, 2003, 2004, and 2005.
(b) No options were issued during fiscal 2003.
The following table sets forth, as of March 31, 2003, the
number of stock options and the value of unexercised stock
options held by the Named Executive Officers and the exercises of
stock options during the year ended March 31, 2003 by the Named
Executive Officers.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END STOCK OPTION VALUES
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired on Value Options at Fiscal Year End (#) Options at Fiscal Year End($)(1)
Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
------------------- ------------ ----------- ----------- ------------- ----------- -------------
Marc Puleo, M.D. 300,000 $ 207,000 1,400,000 240,000 $ 1,734,000 $ 314,400
Menderes Akdag 375,000 648,750 187,500 187,500 382,500 382,500
Bruce S. Rosenbloom - - 25,000 50,000 24,333 48,667
(1) Represents the difference between the closing price ($2.36)
of the Company's Common stock on March 31, 2003, the last trading
day of the Company's 2003 fiscal year, and the exercise price of
the options.
23
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
As of June 13, 2003, there were 19,105,044 shares of the
Company's common stock issued and outstanding. These securities
represent all of the Company's issued and outstanding voting
securities. The following table sets forth, as of the close of
business on June 13, 2003, (a) the name and number of shares of
each person known by us to be the beneficial owner of more than
5% of the class of stock; and (b) the number of shares of these
securities owned by each executive officer and director, (c) and
all executive officers and directors as a group, together with
their respective percentage holdings of such shares. Beneficial
ownership is determined in accordance with the rules of the SEC,
and generally includes voting or investment power with respect to
securities, and includes any securities, which the person has the
right to acquire within 60 days after June 13, 2003, through the
conversion or exercise of any security or other right. Except as
otherwise specifically set forth herein, the following tables
give no effect to the exercise of any outstanding stock options
or warrants. Unless otherwise indicated, the address for each
person is 1441 SW 29 Avenue, Pompano Beach, Florida 33069.
Name Number of Shares Percent of Shares
of Beneficial Owner Beneficially Owned Outstanding
------------------- ------------------ -----------------
Tricon Holdings, LLC 9,550,000 (a) 44.9%
Marc Puleo, M.D. 2,934,250 (b) 14.7%
Guven Kivilcim 2,346,000 (c) 11.9%
International Consultants, LLC 1,111,000 (d) 5.8%
Menderes Akdag 562,500 (e) 2.9%
Bruce S. Rosenbloom 43,767 (f) *
Robert C. Schweitzer 2,000 (g) *
Ronald J. Korn - (g) -
Gian Fulgoni - (g) -
All executive officers and
directors as a group
(seven persons) 5,888,517 28.4%
----------------
* Less than 1% of the issued and outstanding shares.
(a) Tricon Holdings, LLC, ("Tricon") holdings include
2,160,000 shares issuable upon exercise of warrants at
$.33 per share, until November 2005. Guven Kivilcim, a
director of the Company, and Ken Jacobi and Huseyin
Kizanlikli, former directors of the Company, are the
members of Tricon. Creslin Limited ("Creslin") is the
sole shareholder of Tricon. Mr. Robert G. Guest is
the officer, and Mr. Guest and Christopher J. Pitaluga
are the directors of Creslin. Creslin Limited Trust owns
99% of Creslin. Abacus Trustees (Gibraltar) Limited is
the trustee and Mustafa Yesil is the beneficiary of the
Creslin Limited Trust. The address for Tricon is 1020
N.W. 163rd Drive, Miami, FL 33169.
(b) Dr. Puleo's holdings include 2,054,250 shares of our
common stock held by Marpul Trust, a trust established by
Dr. Puleo under an agreement dated September 3, 1999 and
of which he is the beneficiary. Southpac Trust
International, Inc. is a trustee of Marpul Trust. Dr.
Puleo's holdings also include vested options held by him
to purchase 600,000 shares of common stock at $1.25 per
share until May 2008, 200,000 shares of common stock at
$.35 per share until March 2006, and 80,000 shares of
common stock at $1.05 per share until May 2006, but
exclude options to purchase an additional 160,000 shares
of common stock at $1.05, which have not vested yet.
(c) Mr. Kivilcim is a member of Tricon, his holdings include
540,000 shares issuable upon the excerise of warrants at
$.33 per share, until November, 2005.
(d) As reflected on the schedule 13G, which was filed on
September 25, 2002. The address for International
Consultants, LLC is 45 Grand Bay Drive, Key Biscayne, FL
33149.
(e) Mr. Akdag's holdings include vested options to purchase
187,500 shares of common stock at $.32 per share until
March 2006, but exclude options to purchase an additional
187,500 shares of common stock at $.32 per share, which
has not yet vested.
(f) Mr. Rosenbloom's holdings include options to purchase
16,667 shares of common stock at $1.65 per share until
May 2005, 16,667 shares of common stock at $1.65 per
share until May 2006, and 8,333 shares of common stock at
$.86 per share until March 2006, but exclude options to
purchase an additional 16,666 shares of common stock at
$1.65 per share, 16,667 shares of common stock at $.86
per share, and 15,000 shares of common stock at $3.45 per
share which has not yet vested.
(g) Mr. Schweitzer's, Mr. Korn's, and Mr. Fulgoni's holdings
exclude options to purchase an additional 30,000 shares
of common stock at $1.90 per share, which have not yet
vested.
24
Limitation of Liability and Indemnification Matters
Our amended and restated articles of incorporation contain
provisions which eliminate the personal liability of our
directors to us or our stockholders for monetary damages for
breach of their fiduciary duty as a director to the fullest
extent permitted by the Florida Business Corporations Act, except
for liability: for any breach of their duty of loyalty to us or
our stockholders; for act or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; for
unlawful payments of dividends or unlawful stock repurchases or
redemptions; or for any transaction from which the director
derived an improper personal benefit.
These provisions do not affect a director's responsibilities
under any other laws, including the federal securities laws and
state and federal environmental laws.
Item 12. Certain Relationships and Related Transactions.
Guven Kivilcim, a member of Tricon Holdings, LLC and a member
of the Company's board of directors, has an interest in
Intelligent Switching & Software LLC, and Numind Software
Systems, Inc., with which the Company conducted business with
during the fiscal years ended March 31, 2003 and 2002.
Intelligent Switching & Software LLC provided the Company with
long distance telecommunication services, and Numind Software
Systems, Inc. provided the Company with Internet and website
design and hosting services. The Company paid $154,000 and
$64,000 to Intelligent Switching & Software LLC, and $45,000 and
$0 to Numind Software Systems, Inc., for services during the
fiscal years ended March 31, 2003 and 2002, respectively. The
Company owed $5,000 and $64,000 to Intelligent Switching &
Software LLC, and $14,000 and $37,000 to Numind Software Systems,
Inc., which were included in the Company's accounts payable
balance as of March 31, 2003 and 2002, respectively. As of the
date, hereof, the Company no longer conducts business with these
companies.
The Company believes that transactions with our officers,
directors and principal stockholders have been made upon terms no
less favorable to us than we might receive from unaffiliated
third parties. The Company has adopted a policy whereby all
transactions between us and one or more of our affiliates must be
approved in advance by a majority of our disinterested directors.
25
Item 13. Exhibits and Reports on Form 8-K.
(a) Documents filed as part of this Form 10-K.
(1) Consolidated Financial Statements
The following exhibits are filed as part of this 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. (filed herewith).
(16) Letter regarding Change in Certifying Accountant.
16.1 Letter from Lopez, Levi, & Associates LLC, regarding
change in certifying accountants. (incorporated by
reference to Exhibit 16 of the Registrant's Form 8-K
on April 24, 2001, Commission File No. 000-28827).
(21) Subsidiaries of Registrant.
21.1 Subsidiaries of Registrant (filed herewith).
(99) Certifications.
99.1 Certification of Principal Executive Officer Pursuant
to 18 U.S.C. Section 1350 (filed herewith).
99.2 Certification of Principal Financial Officer Pursuant
to 18 U.S.C. Section 1350 (filed herewith).
-----------------------------
(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.
26
(b) Reports on Form 8-K.
(1) On November 20, 2002 the Company filed a report under Item 5
disclosing other events relating to the addition and resignation
on certain members of the Board of Directors. (incorporated by
reference of the Registrant's Form 8-K on November 20, 2002,
Commission File No. 000-28827).
Item 14. Controls and Procedures.
The Company's management, including our Chief Executive Officer
and Chief Financial Officer, have conducted an evaluation of the
effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-14(c) promulgated under the Securities and
Exchange Act of 1934, as amended) as of June 13, 2003 (the
"Evaluation Date") within 90 days prior to the filing date of
this report. 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 subsequent to
the Evaluation Date.
27
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 13, 2003 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 13, 2003.
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
-------------------------- Officer and Director
Marc Puleo, M.D.
/s/ Bruce S. Rosenbloom Chief Financial Officer and
-------------------------- Treasurer
Bruce S. Rosenbloom (principal financial and accounting
officer)
Officer
/s/ Guven Kivilcim Director
--------------------------
Guven Kivilcim
/s/ Robert C. Schweitzer Director
--------------------------
Robert C. Schweitzer
/s/ Ronald J. Korn Director
--------------------------
Ronald J. Korn
/s/ Gian Fulgoni Director
--------------------------
Gian Fulgoni
28
CERTIFICATION
I, MENDERES AKDAG, certify that:
1. I have reviewed this annual report on Form 10-KSB
of PetMed Express, Inc.;
2. Based on my knowledge, this annual report does
not contain any untrue statement of a material
fact or omit to state a material fact necessary
to make the statements made, in light of the
circumstances under which such statements were
made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements,
and other financial information included in this
annual report, fairly present in all material
respects the financial condition, results of
operations and cash flows of the registrant as
of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I
are responsible for establishing and maintaining
disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a. designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this annual report is being prepared;
b. evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this annual report
(the "Evaluation Date"); and
c. presented in this annual report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I
have disclosed, based on our most recent
evaluation, to the registrant's auditors and the
audit committee of the registrant's board of
directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I
have indicated in this annual report whether
there were significant changes in internal
controls or in other factors that could
significantly affect internal controls subsequent
to the date of our most recent evaluation,
including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 13, 2003
By: /s/ Menderes Akdag
---------------------------
Menderes Akdag
Chief Executive Officer
29
CERTIFICATION
I, BRUCE S. ROSENBLOOM, certify that:
1. I have reviewed this annual report on Form 10-KSB
of PetMed Express, Inc.;
2. Based on my knowledge, this annual report does
not contain any untrue statement of a material
fact or omit to state a material fact necessary
to make the statements made, in light of the
circumstances under which such statements were
made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements,
and other financial information included in this
annual report, fairly present in all material
respects the financial condition, results of
operations and cash flows of the registrant as
of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I
are responsible for establishing for establishing
and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-
14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this annual report is being prepared;
b. evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this annual report
(the "Evaluation Date"); and
c. presented in this annual report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I
have disclosed, based on our most recent
evaluation, to the registrant's auditors and the
audit committee of the registrant's board of
directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls: and
6. The registrant's other certifying officers and I
have indicated in this annual report whether
there were significant changes in internal
controls or in other factors that could
significantly affect internal controls subsequent
to the date of our most recent evaluation,
including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 13, 2003
By: /s/ Bruce S. Rosenbloom
------------------------------
Bruce S. Rosenbloom
Chief Financial Officer
30
_________________________________________________________________
_________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
PETMED EXPRESS, INC.
_______________________
Form 10-KSB ANNUAL REPORT
FOR THE FISCAL YEAR ENDED:
MARCH 31, 2003
_______________________
CONSOLIDATED FINANCIAL STATEMENTS
_______________________
_________________________________________________________________
_________________________________________________________________
PETMED EXPRESS, INC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Report.......................... F-2
Consolidated Balance Sheet as of March 31, 2003....... F-3
Consolidated Statements of Income for the fiscal
years ended March 31, 2003 and March 31, 2002....... F-4
Consolidated Statements of Changes in
Shareholders' Equity for the fiscal years ended
March 31, 2003 and March 31, 2002..................... F-5
Consolidated Statements of Cash Flows for the
fiscal years ended March 31, 2003 and
March 31, 2002 ....................................... F-6
Notes to Consolidated Financial Statements............ F-7-F-16
F-1
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
PetMed Express, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of
PetMed Express, Inc. and Subsidiaries (the "Company") as of March
31, 2003, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the
two years in the period then ended. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of PetMed Express, Inc. and Subsidiaries at
March 31, 2003, and the results of their operations and their
cash flows for each of the two years in the period then ended, in
conformity with accounting principles generally accepted in the
United States of America.
/s/Goldstein Golub Kessler LLP
May 10, 2003 ------------------------------
New York, New York Goldstein Golub Kessler LLP
F-2
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31,
2003
-----------
ASSETS
------
Current assets:
Cash and cash equivalents $ 984,169
Accounts receivable, less allowance for
doubtful accounts of $16,644 651,883
Inventories 4,268,146
Prepaid expenses and other current assets 478,108
-----------
Total current assets 6,382,306
Property and equipment, net 1,496,979
Deferred income taxes 581,356
Intangible asset 365,000
Other assets 200,155
-----------
Total assets $ 9,025,796
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 3,296,223
Current portion of loan obligation 68,442
-----------
Total current liabilities 3,364,665
Loan obligation, less current portion 68,443
-----------
Total liabilities 3,433,108
-----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized; 2,500 convertible shares
issued and outstanding with a liquidation
preference of $4 per share 8,898
Common stock, $.001 par value, 40,000,000
shares authorized; 18,460,878 shares issued
and outstanding 18,461
Additional paid-in capital 7,279,207
Accumulated deficit (1,713,878)
-----------
Total shareholders' equity 5,592,688
-----------
Total liabilities and shareholders' equity $ 9,025,796
===========
See accompanying notes to consolidated financial statements
F-3
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended March 31,
-------------------------
2003 2002
----------- -----------
Sales $ 54,974,916 32,025,931
Cost of sales 31,517,639 18,894,493
----------- -----------
Gross profit 23,457,277 13,131,438
----------- -----------
Operating expenses:
General and administrative 7,956,786 6,094,493
Advertising 11,649,811 5,717,242
Severance charges - 195,000
Depreciation and amortization 367,673 376,763
----------- -----------
Total operating expenses 19,974,270 12,383,498
----------- -----------
Income from operations 3,483,007 747,940
----------- -----------
Other income (expense):
Adjustment of estimate for legal
settlement - 345,000
Gain (loss) on disposal of property
and equipment 15,000 (314,332)
Interest expense (30,658) (48,835)
Interest income 6,973 18,582
Other, net 6,084 77,058
----------- -----------
Total other income (expense) (2,601) 77,473
----------- -----------
Income before provision for income taxes 3,480,406 825,413
Provision for income taxes 222,841 -
----------- -----------
Net income $ 3,257,565 825,413
=========== ===========
Net income per common share:
Basic $ 0.19 0.05
=========== ===========
Diluted $ 0.16 0.04
=========== ===========
Weighted average number of common
shares outstanding:
Basic 17,300,130 16,360,010
=========== ===========
Diluted 20,749,515 19,739,493
=========== ===========
See accompanying notes to consolidated financial statements
F-4
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Fiscal years ended March 31, 2003 and March 31, 2002
Convertible Common Additional
Preferred Stock Stock Paid-In Accumulated
Shares Amounts Shares Amounts Capital Deficit Total
--------------------- --------------------- ---------- ----------- ---------
Balance, March 31, 2001 2,500 8,898 16,360,010 16,360 6,528,885 (5,796,856) 757,287
Net income - - - - - 825,413 825,413
----- ------- ---------- ------ --------- ----------- ---------
Balance, March 31, 2002 2,500 8,898 16,360,010 16,360 6,528,885 (4,971,443) 1,582,700
Issuance of common
stock from exercise of
stock options - - 1,018,833 1,019 304,360 - 305,379
Issuance of common
stock from exercise of
warrants - - 1,082,035 1,082 274,375 - 275,457
Tax benefit related to
stock options exercised - - - - 171,587 - 171,587
Net income - - - - - 3,257,565 3,257,565
----- ------- ---------- ------ --------- ----------- ---------
Balance, March 31, 2003 2,500 8,898 18,460,878 18,461 7,279,207 (1,713,878) 5,592,688
See accompanying notes to consolidated financial statements
F-5
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
-----------------------
2003 2002
--------- ----------
Cash flows from operating activities:
Net income $ 3,257,565 825,413
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 367,673 376,763
Tax benefit related to stock options exercised 171,587 -
Amortization of deferred membership fee revenue - (140,048)
(Gain) loss on disposal of property and equipment (15,000) 314,332
Bad debt expense 15,027 6,862
Deferred income taxes (581,356) -
(Increase) decrease in operating assets and liabilities:
Accounts receivable (375,397) (135,907)
Inventories (1,961,526) (1,675,226)
Prepaid expenses and other current assets (329,500) (126,494)
Other assets (150,000) (42,500)
Accounts payable and accrued expenses 571,228 1,072,829
--------- ----------
Net cash provided by operating activities 970,301 476,024
--------- ----------
Cash flows from investing activities:
Net proceeds from the sale of property and equipment 15,000 2,016,921
Purchases of property and equipment (744,596) (555,645)
Purchase of intangible asset (365,000) -
--------- ----------
Net cash (used in) provided by investing activities (1,094,596) 1,461,276
--------- ----------
Cash flows from financing activities:
Payments on mortgage payable - (1,566,833)
Payments on capital lease obligations - (247,209)
(Payments) borrowings on loan agreement (68,442) 205,327
Payments on line of credit agreement (141,214) -
Proceeds from the exercise of stock options and warrants 580,836 -
--------- ----------
Net cash provided by (used in) financing activities 371,180 (1,608,715)
--------- ----------
Net increase in cash and cash equivalents 246,885 328,585
Cash and cash equivalents, at beginning of year 737,284 408,699
--------- ----------
Cash and cash equivalents, at end of year $ 984,169 737,284
========= ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 30,675 29,150
========= ==========
Cash paid for income taxes $ 508,000 -
========= ==========
See accompanying notes to consolidated financial statements
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Organization
PetMed Express, Inc. and its subsidiaries, d/b/a 1-800-
PetMeds, (the "Company") is a leading nationwide pet
pharmacy. The Company markets prescription and non-
prescription pet medications, along with health and
nutritional supplements, for cats and dogs direct to the
consumer.
The Company markets its products through national
television, on-line and direct mail advertising campaigns,
which aim to increase the recognition of the "1-800-PetMeds"
brand name, increase traffic on its web site at
www.1800PetMeds.com , acquire new customers, and maximize
repeat purchases. The majority of all of the Company's sales
are to residents of the United States. The Company's
executive offices are located in Pompano Beach, Florida.
During the fiscal year ended March 31, 2001, the Company
formed two wholly owned subsidiaries. One company was
formed to assist in the purchasing of products and the other
for advertising. The Company's fiscal year end is March 31.
References herein to fiscal 2003 or 2002 refer to the
Company's fiscal years ended March 31, 2003 and 2002,
respectively.
Principles of Consolidation
The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All
significant intercompany transactions have been eliminated
in consolidation.
Revenue Recognition
The Company generates revenue by selling pet medication
products primarily to retail consumers and minimally to
wholesale customers. The Company's policy is to recognize
revenue from product sales upon shipment, when the rights of
ownership and risk of loss have passed to the consumer.
Outbound shipping and handling fees are included in sales
and are billed upon shipment. Shipping and handling
expenses are included in cost of sales.
The majority of the Company's sales are paid by credit cards
and the Company usually receives the cash settlement in one
to three banking days. Credit card sales minimize our
accounts receivable balances relative to our sales. The
Company maintains an allowance for doubtful accounts for
losses that the Company estimates will arise from the
customers' inability to make required payments, arising from
either credit card charge-backs or insufficient fund checks.
The Company determines its estimates of the uncollectibility
of accounts receivable by analyzing historical bad debts and
current economic trends. At March 31, 2003 the allowance
for doubtful accounts was approximately $17,000.
Cash and Cash Equivalents
The Company considers all highly liquid investments with
maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents at March 31, 2003,
consist of the Company's cash accounts, overnight repurchase
agreements, and short-term investments with a maturity of
three months or less. The carrying amount of cash
equivalents approximates fair value.
The Company maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts.
Use of Estimates
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles in
the United States of America requires management to make
estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
F-7
(1) Summary of Significant Accounting Policies (Continued)
Inventories
Inventories consist of prescription and non-prescription pet
medications that are available for sale and are priced at
the lower of cost or market value using a weighted average
cost method. The Company writes down its inventory for
estimated obsolescence. At March 31, 2003 the inventory
reserve was approximately $87,000.
Property and Equipment
Property and equipment are stated at cost and depreciated
using the straight-line method over the estimated useful
lives of the assets. The furniture, fixtures, equipment and
computer software are depreciated over periods ranging from
three to seven years. Leasehold improvements and assets
under capital lease agreements are amortized over the
shorter of the underlying lease agreement or the useful life
of the asset.
Long-lived Assets
Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the
carrying amount may not be recoverable. Recoverability of
assets is measured by a comparison of the carrying amount of
the asset to net future cash flows expected to be generated
from the asset.
Intangible Asset
The intangible asset consists of a toll free telephone
number, which the Company obtained in the quarter ended
September 30, 2002. The Company paid $365,000, to reimburse
previously expended advertising costs relating to obtaining
the rights to the toll free number. In accordance with the
Statement of Financial Accounting Standards ("SFAS") No.
142, Goodwill and Other Intangible Assets, the intangible
asset is not being amortized, and is subject to an annual
review for impairment.
Advertising
The Company's advertising expense consists primarily of
television advertising, internet marketing, catalog and
postcard production, and mailing costs. Television costs
are expensed as the ads are televised and catalog and
postcard costs are expensed when the related catalog and
postcards are produced, distributed or superseded.
Accounting for Stock-Based Compensation
The Company accounts for employee stock options using the
intrinsic value method as prescribed by Accounting
Principles Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees. The Company follows the
disclosure provisions of SFAS No. 123, Accounting for Stock-
Based Compensation, for employee stock options. Had the
Company determined employee compensation cost based on the
fair value at the grant date for its stock options under
SFAS No. 123, the Company's net income would have been
decreased to the pro forma amounts indicated below:
Year Ended March 31, 2003 2002
-------------------- --------- ---------
Reported net income: $ 3,257,565 $ 825,413
Deduct: total stock-based employee
compensation expense determined
under fair-value based method
for all awards, net of related
tax effects 285,258 129,465
--------- ---------
Proforma net income: 2,972,307 695,948
========= =========
Reported basic net income per share: $ 0.19 $ 0.05
========= =========
Proforma basic net income per share: $ 0.17 $ 0.04
========= =========
Reported diluted net income per share: $ 0.16 $ 0.04
========= =========
Proforma diluted net income per share: $ 0.14 $ 0.04
========= =========
F-8
(1) Summary of Significant Accounting Policies (Continued)
The per share weighted-average fair value of stock options
granted during fiscal 2003 and 2002 was $1.28, and $.70,
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: dividend yield
0.0 percent and 0.0 percent; risk-free interest rates of 4.0
percent and 6.0 percent; expected lives of 3-5 years and 3-5
years, and expected volatility of 62 percent and 60 percent,
respectively.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash
equivalents, accounts receivable and accounts payable
approximate fair value due to the short-term nature of these
instruments. The carrying amount of the loan payable
approximates fair value as their interest rates approximate
current market rates.
Comprehensive Income
The Company has adopted SFAS No. 130, Reporting
Comprehensive Income, which requires that all items that are
recognized under accounting standards as components of
comprehensive income be reported in a financial statement
that is displayed with the same prominence as other
financial statements. The items of other comprehensive
income that are typically required to be displayed are
foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain
investments in debt and equity securities. There were no
items of other comprehensive income for any periods
presented herein.
Income Taxes
The Company accounts for income taxes under the provisions
of SFAS No. 109, Accounting for Income Taxes, which
generally requires recognition of deferred tax assets and
liabilities for the expected future tax benefits or
consequences of events that have been included in the
consolidated financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined
based on differences between the financial reporting
carrying values and the tax bases of assets and liabilities,
and are measured by applying enacted tax rates and laws for
the taxable years in which those differences are expected to
reverse.
Recent Accounting Pronouncements
The Company does not believe that any recently issued, but
not yet effective, accounting standard, if currently
adopted, will have a material effect on the Company's
consolidated financial position, results of operations or
cash flows.
(2) Property and Equipment
Major classifications of property and equipment consist of
the following:
March 31,
2003
-----------
Leasehold improvements 289,901
Computer software 327,197
Furniture, fixtures and equipment 1,606,484
Equipment and software under capital lease 113,398
-----------
2,336,980
Less: accumulated depreciation and amortization (840,001)
-----------
Property and equipment, net $ 1,496,979
===========
Amortization expense for equipment and software under
capital leases was $24,123 and $93,169 for fiscal 2003 and
2002, respectively.
F-9
(3) Mortgage Payable, Line of Credit Agreement and Loan
Obligation
On May 31, 2001, the Company sold their 50,000 square foot
office building, which houses the Company's principal
executive offices and warehouse, to an unrelated third
party. The Company received gross proceeds of $2,150,000,
of which approximately $1,561,000 was used to pay off the
mortgage, and the Company recognized a loss on the sale of
approximately $185,000. The Company then entered into a
five-year term lease agreement for 20,000 of the 50,000
square foot Pompano Beach office building. On February 22,
2002, the Company entered into a lease addendum which added
approximately 12,000 square feet, effective June 1, 2002, to
accommodate the Company's warehouse expansion.
On July 22, 2002, the Company executed an agreement which
increased the line of credit from $150,000 to $1,000,000.
On March 18, 2003, the Company increased the line of credit
agreement from $1,000,000 to $2,000,000, effective through
July 22, 2004. The interest rate is at the published thirty
day London Interbank Offered Rates ("LIBOR") plus 2.65%
(3.92% at March 31, 2003), and contains various financial
and operating covenants. At March 31, 2003, there was no
outstanding balance under the line of credit agreement.
On March 12, 2002, the Company entered into a $205,000,
three year term loan agreement with a bank, with interest
accruing at the lending institution's base rate plus 1%
(5.25% at March 31, 2003). The loan proceeds were used to
purchase a $250,000 computer server. The aggregate loan
maturities are $68,000 per year for three years.
The line of credit and the term loan are secured by
substantially all of the Company's assets.
(4) Shareholders' Equity
On November 22, 2000, Tricon Holdings, LLC, a Florida
limited liability corporation ("Tricon") a related party
(see Note 7), acquired 10,000,000 shares of the Company's
authorized and unissued shares of common stock and warrants
to purchase 3,000,000 shares of the Company's authorized and
unissued shares of common stock. The warrants are
exercisable at $.33 per share and expire on November 22,
2005. Tricon acquired the Company's shares and warrants in
exchange for $2,000,000, which was paid in fiscal year 2001.
On May 31, 2001, the Company's Board of Directors adopted an
amendment to the Corporations Articles of Incorporation to
provide for the increase in the authorized amount of shares
of common stock from 20,000,000 to 40,000,000 and adopt an
amendment to the Company's 1998 Stock Option Plan (the
"Plan") to increase the number of shares of common stock
issuable under the Plan from 3,000,000 to 5,000,000 shares.
Preferred Stock
In April 1998, the Company issued 250,000 shares of its
$.001 par value preferred stock at a price of $4.00 per
share, less issuance costs of $112,187. Each share of the
preferred stock is convertible into approximately 4.05
shares of common stock at the election of the shareholder.
The preferred stock was recorded at $887,813, net of the
value of the beneficial conversion feature of $771,525. The
value of the beneficial conversion feature was computed as
the difference between the closing market price of the
Company's common stock ($1.75 per share) and the conversion
price of the preferred stock ($.988 per share) on the date
the preferred stock was sold. This amount was immediately
recognized as a reduction to net income available to common
stockholders. The shares have a liquidation value of $4.00
per share and may pay dividends at the sole discretion of
the Company. The Company does not anticipate paying
dividends to the preferred shareholders in the foreseeable
future. Each share of preferred stock is entitled to one
vote on all matters submitted to a vote of shareholders of
the Company. As of March 31, 2003, 2,500 shares of the
convertible preferred stock remained unconverted and
outstanding.
F-10
(5) 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, March 31,
2003 2002
----------- -----------
Deferred tax assets:
Bad debt and inventory reserves 39,041 30,946
Deferred compensation (stock options) 59,814 231,400
Intangible assets - 7,410
Accrued expenses 58,033 155,087
Net operating loss carryforward 1,439,932 1,856,732
----------- -----------
Deferred tax assets 1,596,820 2,281,575
Less: valuation allowance (938,766) (2,204,877)
----------- -----------
Total deferred tax assets 658,054 76,698
Deferred tax liabilities:
Depreciation (76,698) (76,698)
----------- -----------
Total net deferred taxes $ 581,356 $ -
=========== ===========
The change in the valuation allowance for the year ended
March 31, 2003, is approximately $1,266,000. At March 31,
2003, the Company had net operating loss carryforwards of
approximately $3,800,000, of which $159,000 relate to the
exercise of stock options that will result in an adjustment
to equity when the benefit is realized. The net operating
loss carryforwards expire in the years 2013 through 2020.
The use of such net operating loss carryforwards is limited
to approximately $266,000 annually; due to the November 22,
2000 change of control.
The reconciliation of income tax provision computed at the
U.S. federal statutory tax rates to income tax expense is as
follows:
March 31, March 31,
2003 2002
----------- -----------
Income taxes at U.S. statutory rates $ 1,183,338 $ 280,640
State income taxes, net of federal tax
benefit 126,339 29,962
Permanent differences 1,512 877
Other 177,763 -
Change in valuation allowance (1,266,111) -
Utilization of net operating loss
carryforwards - (311,479)
----------- -----------
$ 222,841 $ -
=========== ===========
F-11
(6) Stock Options and Warrants
Stock Options Granted to Employees
The Company established the 1998 Stock Option Plan (the
"Plan") effective July 31, 1998, which provides for the
issuance of qualified options to officers, directors and key
employees, and nonqualified options to consultants and other
service providers. The Company has reserved 5,000,000
shares of common stock for issuance under the Plan. The
exercise prices of options issued under the Plan must be
equal to or greater than the market price of the Company's
common stock as of the date of issuance. The Company had
2,639,600 options outstanding under the Plan and 104,000 non
plan options at March 31, 2003. 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 4,544,700 $ 1.24
Options Granted 387,500 1.26
Options Canceled (695,100) 2.81
----------- ----------
Balance at March 31, 2002 4,237,100 0.98
Options Granted 910,432 0.75
Options and Warrants Exercised (1,800,868) 0.36
Options Canceled (603,064) 1.45
----------- ----------
Balance at March 31, 2003 2,743,600 $ 1.06
=========== ==========
The following table summarizes information for options
currently outstanding and exercisable at March 31, 2003:
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted- Weighted- Weighted-
average average average
Exercise Remaining Exercise Exercise
Price Range Number Life Price Number Price
-------------- ----------------------------------- ---------------------
$ 0.20 - $0.86 862,500 4.35 years $ 0.44 539,164 $ 0.40
1.05 - 1.76 1,756,500 4.74 years 1.28 1,503,200 1.28
1.90 - 4.50 124,600 4.07 years 2.43 34,600 3.80
-------------- ----------------------------------- ---------------------
$ 0.20 - $4.50 2,743,600 4.58 years $ 1.06 2,076,964 $ 1.09
============== =================================== =====================
At March 31, 2003 and March 31, 2002, the number of options
exercisable was 2,076,964 and 2,752,803, respectively, and
the weighted-average exercise price of those options was
$1.09 and $.96, respectively. Adjustments are made for
options forfeited prior to vesting.
Warrants
At March 31, 2003, there were 2,775,000 warrants
outstanding. On November 22, 2000, Tricon Holdings, LLC, a
Florida limited liability corporation ("Tricon"), acquired
10,000,000 shares of the Company's authorized and unissued
shares of common stock and warrants to purchase 3,000,000
shares of the Company's authorized and unissued shares of
common stock. The warrants are exercisable at $.33 per
share and expire on November 22, 2005, and were assigned a
value of $601,260 using the Black Scholes option-pricing
model, as prescribed by SFAS No. 123, with the following
weighted-average assumptions: dividend yield 0.0 percent;
risk-free interest rates of 6.00 percent; expected lives of
3-5 years, and expected volatility of 91 percent. On
September 30, 2002, Tricon exercised 300,000 warrants at the
exercise price of $.33 per share, and the Company received
proceeds of $99,000.
F-12
(7) Related Party Transactions
Guven Kivilcim, a member of Tricon Holdings, LLC and a
member of the Company's board of directors, has an interest
in Intelligent Switching & Software LLC, and Numind Software
Systems, Inc., with which the Company conducted business
with during the fiscal years ended March 31, 2003 and 2002.
Intelligent Switching & Software LLC provided the Company
with long distance telecommunication services, and Numind
Software Systems, Inc. provided the Company with Internet
and website design and hosting services. The Company paid
$154,000 and $64,000 to Intelligent Switching & Software
LLC, and $45,000 and $0 to Numind Software Systems, Inc.,
for services during the fiscal years ended March 31, 2003
and 2002, respectively. The Company owed $5,000 and $64,000
to Intelligent Switching & Software LLC, and $14,000 and
$37,000 to Numind Software Systems, Inc., which were
included in the Company's accounts payable balance as of
March 31, 2003 and 2002, respectively.
(8) Net Income Per Share
In accordance with the provisions of SFAS No. 128, "Earnings
Per Share," basic net income per share is computed by
dividing net income available to common shareholders by the
weighted average number of common shares outstanding during
the period. Diluted net income per share includes the
dilutive effect of potential stock options exercises,
calculated using the treasury stock method. Outstanding
stock options, warrants, and convertible preferred shares
issued by the Company represent the only dilutive effect
reflected in diluted weighted average shares outstanding.
The following is a reconciliation of the numerators and
denominators of the basic and diluted net income per share
computations for the periods presented:
March 31, March 31,
2003 2002
----------- -----------
Net income (numerator):
Net income $ 3,257,565 $ 825,413
=========== ===========
Shares (denominator)
Weighted average number of common shares
outstanding used in basic computation 17,300,130 16,360,010
Common shares issuable upon exercise
of stock options and warrants 3,439,260 3,369,358
Common shares issuable upon conversion
of preferred shares 10,125 10,125
----------- -----------
Shares used in diluted computation 20,749,515 19,739,493
=========== ===========
Net income per common share:
Basic $ 0.19 $ 0.05
=========== ===========
Diluted $ 0.16 $ 0.04
=========== ===========
At March 31, 2003, 124,600 shares of common stock options
and warrants, with a weighted average exercise price of
$2.43, 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.
F-13
(9) Valuation and Qualifying Accounts
Activity in the Company's valuation and qualifying accounts
consists of the following:
Year Ended March 31,
------------------------
2003 2002
---------- ----------
Allowance for doubtful accounts:
Balance at beginning of period $ 7,475 $ 9,740
Provision for doubtful accounts 14,759 (319)
Write-off of uncollectible accounts receivable (5,590) (1,946)
---------- ----------
Balance at end of period $ 16,644 $ 7,475
========== ==========
Valuation allowance for deferred tax assets:
Balance at beginning of period 2,204,877 2,554,081
(Deletions) / additions (1,266,111) (349,204)
---------- ----------
Balance at end of period $ 938,766 $ 2,204,877
========== ==========
(10) Commitments and Contingencies
Legal Matters
Various complaints had been filed with the Florida Board of
Pharmacy. These complaints, the majority of which were
filed by veterinarians who are in competition with the
Company for the sale of pet prescription-required products,
alleged violations of the Pharmacy Practice Act and
regulations promulgated thereunder. The vast majority of
the complaints alleged that the Company, through its
pharmacists, improperly dispensed prescription-required
veterinary medication based on prescriptions verified
through the Company's discontinued alternate veterinarian
program. The alternate veterinarian program used a
veterinarian outside the state of Florida to verify
prescriptions for certain pets outside the state of Florida.
While the program was not used for pets residing in the
state of Florida, the complaints had, for the most part,
been filed with the Florida Board of Pharmacy. Other
complaints alleged the dispensing of medication without a
valid prescription, the sale of non-conforming products and
that the Company's pharmacy was operating at the same
location as another pharmacy, with which it had a
contractual relationship. The Company contested all
allegations and continued discussions in an attempt to reach
a resolution of these matters.
In February 2002, the Company voluntarily ceased the use of
its alternate veterinarian program, and in March 2002 a
business decision was made to enter into a settlement
agreement with the Florida Board of Pharmacy, rather than to
proceed with costly and lengthy litigation. In April 2002,
the Florida Board of Pharmacy approved the settlement
agreement. The Florida Board of Pharmacy did not reach any
finding of fact or conclusion of law that the Company
committed any wrongdoing or violated any rules or laws
governing the practice of pharmacy. According to the
settlement agreement, the Company's pharmacy license was
placed on probation for a period of three years and the
Company, the Company's pharmacists and contracted pharmacy
and pharmacist, paid approximately $120,000 in fines and
investigative costs, in July 2002. The Company remains
licensed with the State of Florida and continues to operate
its principal business in Florida.
Additional complaints have been filed with other states'
Pharmacy Boards. These complaints, the majority of which
were filed by veterinarians who are in competition with the
Company for the sale of pet prescription-required products,
allege violations of the Pharmacy Practice Act and
regulations promulgated thereunder. The vast majority of
the complaints allege that the Company, through its
pharmacists, improperly dispensed prescription-required
veterinary medication based on prescriptions verified
through the Company's alternate veterinarian program. The
Company contested all allegations and continued discussions
in an attempt to reach a resolution of these matters.
F-14
(10) Commitments and Contingencies (Continued)
In fiscal 2003, the Company reached settlement agreements
with the Louisiana, Missouri, New Mexico, and Ohio State
Pharmacy Boards. According to the settlement agreements,
the Company was required to terminate the alternate
veterinarian program in the state and the Company's permit
was placed on probation. As of March 31, 2003, the Company
had paid all fines in full to cover any or all
administrative and investigative costs associated with these
settlements. At March 31, 2003, there was no accrual
relating to these settlements. There can be no assurances
made that other states will not attempt to take similar
actions against the Company in the future.
In February 2000, the United States Environmental Protection
Agency ("EPA") issued a Stop Sale, Use or Removal Order to
the Company regarding the alleged distribution or sale of
misbranded Advantage products in violation of the Federal
Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as
amended. The order provides that the company shall not
distribute, sell, use or remove the products listed in the
order, which are allegedly misbranded. The order further
provides that the Company shall not commence any sale or
distribution of those products without the prior written
approval from the EPA. The Stop Sale, Use or Removal Order
does not assert any claim for monetary damages; rather, it
is in the nature of a cease and desist order. The Company
denied any alleged violations. On February 16, 2000, the
Company submitted a written response to the order. The EPA
assessed a fine in the amount of $445,000. In fiscal 2001
the Company accrued $445,000 of legal settlement expense.
In September 2001, the Company and the EPA entered into a
Consent Agreement and Final Order ("CAFO"). The settlement
agreement required the Company to pay a civil penalty of
$100,000 plus interest, requiring a payment of $56,000,
which was paid in September 2002, and $53,000 due on
September 30, 2003, a reduction from the previously assessed
fine of $445,000. For the purpose of this CAFO, the Company
admitted to the jurisdictional allegations set forth, and
neither admitted nor denied the alleged violations. On
September 28, 2001, the CAFO was approved and ordered by the
regional judicial officer. Accordingly, a gain of $345,000
was reflected in the statement of income for the year ended
March 31, 2002, to reflect the adjustment to this
settlement.
On March 19, 2002, Novartis Animal Health U.S., Inc.
("Novartis") filed a complaint against the Company and two
other defendants in U.S. District Court for the Southern
District of Florida. Novartis purports to assert seven
claims related to the Company's alleged sale of pet
medications produced for a Novartis Australian sister
company: Count I: Infringement of Registered Trademark Under
Section 32 of the Lanham Act, 15 U.S.C. 1114; Count II:
Infringement of Unregistered Trademarks Under Section 43(a)
of the Lanham Act, 15 U.S.C. 1125(a); Count III: False
Advertising Under Section 43(a) of the Lanham act, 15 U.S.C.
1125(a); Count IV: Misleading Advertising Under Florida
Statutory Law; Count V: Deceptive and Unfair Trade Practices
Under Florida Statutory Law; Count VI: Injury to Business
Reputation Under Florida Statutory Law; Count VII: Common
Law Unfair Competition. Subsequent to the year ended March
31, 2003, the Company reached a final settlement agreement
with Novartis. According to the confidential settlement
agreement dated April 7, 2003, the Company has
satisfactorily resolved the contested issues raised by the
complaint and the confidential settlement terms will not
have a material impact on the Company's operations and
financial results.
The Company is a defendant in a lawsuit in Texas state
district court seeking injunctive and monetary relief styled
Texas State Board of Pharmacy and State Board of Veterinary
Medical Examiners v. PetMed Express, Inc. Cause No.GN-
202514, in the 201st Judicial District Court, Travis County,
Texas. The Company in its initial pleading denied the
allegations contained therein. The Company will vigorously
defend, is confident of its compliance with the applicable
law, and finds wrong-on-the-facts the vast majority of the
allegations contained in the Plaintiffs' supporting
documentation attached to the lawsuit. Discovery has
recently commenced. At this early stage of the litigation
it is difficult to assess any possible outcome or estimate
any potential loss in the event of an adverse outcome.
Routine Proceedings
The Company is a party to routine litigation incidental to
its business. The Company's management does not believe
that the resolution of any or all of such routine litigation
is likely to have a material adverse effect on the Company's
financial condition or results of operations.
F-15
(10) Commitments and Contingencies (Continued)
Employment Agreement
On March 16, 2001, the Company entered into an employment
agreement with its Chief Executive Officer ("CEO"). Under
the terms of this three-year agreement the Company will pay
the CEO an annual salary of $150,000 for the first six
months of the agreement, and thereafter his annual salary
will be increased to $200,000. The Company also granted the
CEO options to purchase 750,000 shares of its common stock
under the Company's 1998 Stock Option Plan at an exercise
price of $.32 per share, which vest at the rate of 187,500
options on each of March 16, 2001, 2002, 2003 and 2004.
Operating Lease
The Company leases their 32,000 square foot principal
executive offices and warehouse, which expires in fiscal
2007. The Company is responsible for certain maintenance
costs, taxes and insurance under this lease. The future
minimum annual lease payments as of March 31, 2003, are as
follows:
Years Ending March 31,
----------------------
2004 $ 277,000
2005 288,000
2006 300,000
2007 50,000
-----------
Total lease payments $ 915,000
===========
Rent expense was $253,000 and $149,000 for the year ended
March 31, 2003 and 2002, respectively.
(11) Subsequent Events
Subsequent to fiscal 2003, the Company received net proceeds
of $766,000 upon the exercise and issuance of 644,166 shares
of common stock, of which 600,000 shares were exercised by
the Company's president.
(12) Quarterly Financial Data (unaudited)
Summarized unaudited quarterly financial data for fiscal
2003 and 2002 is as follows:
Quarter Ended: June 30, 2002 September 30, 2002 December 31, 2002 March 31, 2003 (a)
Sales $ 14,830,755 $ 14,229,702 $ 11,050,124 $ 14,864,335
Income from operations $ 1,291,235 $ 307,754 $ 693,269 $ 1,190,749
Net income $ 902,329 $ 204,887 $ 434,710 $ 1,715,639
Diluted net income per share $ 0.04 $ 0.01 $ 0.02 $ 0.09
Quarter Ended: June 30, 2001 September 30, 2001 December 31, 2001 March 31, 2002
Sales $ 5,363,650 $ 7,762,825 $ 8,248,904 $ 10,650,552
(Loss) income from operations $ (880,765) $ 56,246 $ 368,433 $ 1,204,026
Net (loss) income $ (1,090,684) $ 393,378 $ 353,348 $ 1,169,371
Diluted net (loss) income
per share $ (0.07) $ 0.02 $ 0.02 $ 0.07
(a) The Company recorded a deferred tax asset of
approximately $581,000, during the quarter ended March 31,
2003, resulting in an increase of diluted net income of $.03
per share.
F-16
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_________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
PETMED EXPRESS, INC
_______________________
Form 10-KSB ANNUAL REPORT
FOR THE FISCAL YEAR ENDED:
MARCH 31, 2003
_______________________
EXHIBITS
_______________________
_________________________________________________________________
_________________________________________________________________
EXHIBIT INDEX
-------------
Number of Pages Incorporated
Exhibit in Original By
Number Description Document+ Reference
10.9 Third Line of Credit ($2,000,000)
Agreement with SouthTrust Bank, 20 **
N.A.
99.1 Certification of Principal
Executive Officer Pursuant to 18 1 **
U.S.C. Section 1350
99.2 Certification of Principal
Financial Officer Pursuant to 18 1 **
U.S.C. Section 1350
21.1 Subsidiaries of the Company 1 **
** Filed herewith