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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 000-28827
PETMED EXPRESS, INC.
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(Exact name of registrant in its charter)
Florida 65-0680967
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(State or other jurisdiction (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)
Registrant's telephone number, including area code: (954) 979-5995
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Securities registered under Section 12(b) of the Act:
Title of each class: Name of each exchange
on which registered:
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None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
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 last sold, or the average
bid and asked price of such common equity, as of the last
business day of the registrant's most recently completed second
quarter, was $68,139,000 (at September 30, 2003).
The number of shares of the Registrant's common stock
outstanding as of June 11, 2004 was 22,036,058.
DOCUMENTS INCORPORATED BY REFERENCE
Information included in our definitive proxy statement for our
2004 annual meeting of stockholders to be held on August 6, 2004
is incorporated by reference in Items 10, 11, 12, 13, and 14 of
Part III of this report.
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PETMED EXPRESS, INC.
2004 Form 10-K Annual Report
TABLE OF CONTENTS
Item No. Description Page
- -------- ----------- ----
PART I....................................................... 2
Item 1. Business......................................... 2
Item 2. Properties....................................... 10
Item 3. Legal Proceedings................................ 10
Item 4. Submission of Matters to a Vote of
Security Holders............................... 11
PART II...................................................... 12
Item 5. Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities................. 12
Item 6. Selected Financial Data.......................... 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations.................................. 14
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.............................. 19
Item 8. Financial Statements and Supplementary
Data........................................... 20
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure......... 20
Item 9A. Controls and Procedures.......................... 20
PART III..................................................... 20
Item 10. Directors and Executive Officers of the
Registrant..................................... 20
Item 11. Executive Compensation........................... 20
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters............................ 20
Item 13. Certain Relationships and Related Transactions... 20
Item 14. Principal Accounting Fees and Services........... 20
PART IV...................................................... 21
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................ 21
SIGNATURES................................................... 23
1
PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain information in this Annual Report on Form 10-K
includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. You can identify these forward-
looking statements by the words "believes," "intends,"
"expects," "may," "will," "should," "plan," "projects,"
"contemplates," "intends," "budgets," "predicts," "estimates,"
"anticipates," or similar expressions. These statements are
based on our beliefs, as well as assumptions we have used based
upon information currently available to us. Because these
statements reflect our current views concerning future events,
these statements involve risks, uncertainties and assumptions.
Actual future results may differ significantly from the results
discussed in the forward-looking statements. A reader, whether
investing in our common stock or not, should not place undue
reliance on these forward-looking statements, which apply only
as of the date of this annual report.
When used in this annual report on Form 10-K, "PetMed
Express," "1-800-PetMeds," "PetMed," "1-888-PetMeds," "PetMed
Express.com," "the Company," "we," "our," and "us" refer to
PetMed Express, Inc. and our subsidiaries.
Item 1. 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, and 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,
online and direct mail advertising campaigns, which aim to
increase the recognition of the "1-800-PetMeds" brand name,
increase traffic on its website at www.1800PetMeds.com, acquire
new customers, and maximize repeat purchases. Our fiscal year
end is March 31, our executive offices are located at 1441 S.W.
29th Avenue, Pompano Beach, Florida 33069, and our telephone
number is 954-979-5995. The information contained on the
Company's website is not part of our annual report.
Our Products
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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], Heartguard[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
website is designed to give us the flexibility to change featured
products or promotions. Our product line provides customers with
a wide variety of selections across the most popular health
categories for dogs and cats. Our current products include:
Non-Prescription Medications (OTC): Flea and tick control
products, bone and joint care products, vitamins and
nutritional supplements, and hygiene products.
Prescription Medications (RX): Heartworm treatments, thyroid
and arthritis medications, antibiotics, and other specialty
medications, as well as generic substitutes.
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:
Year Ended March 31,
2004 2003 2002
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Non-prescription medications 69% 64% 58%
Prescription medications 30% 29% 34%
Shipping and handling charges and other 1% 7% 8%
---- ---- ----
Total 100% 100% 100%
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We offer our products through three main sales channels,
including the PetMed Express catalog and postcards, customer
service representatives and the Internet, through our website.
We have designed both our catalog and website to provide a
convenient, cost-effective and informative shopping experience
that encourages consumers to purchase products important for a
pet's health and quality of life. We believe that these multiple
channels allow us to increase the visibility of our brand name
and provide customers with increased shopping flexibility and
service.
2
The PetMed Express Catalog
The PetMed Express catalog is a full-color catalog that
features approximately 600 products. The catalog is produced by
a combination of in-house writers, production artists and
independent contractors. We mail catalogs and postcards in
response to requests generated from our advertising and direct
mail campaigns.
Contact Center
We currently employ 111 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 Website
We seek to combine our product selection and pet health
information with the shopping ease of the Internet to deliver a
convenient and personalized shopping experience. Our website
offers health and nutritional product selections for dogs and
cats, supported by relevant editorial and easily obtainable or
retrievable resource information. From our home page, customers
can search our website for products and access resources on a
variety of information on cats and dogs. Customers can shop at
our website by category, product line or individual product. We
attracted approximately 5.4 million visitors to our website over
the past 12 months (June 2003 to May 2004), approximately 13% of
those visitors placed an order, and our website generated
approximately 50% of our total sales for the same time period.
In March 2004 the Company introduced a newly implemented, free
service on its website, called, "ASK THE VET" which is located at
www.1800PetMeds.com. Pet owners or anyone else can ask a
question and a veterinarian or pharmacist will personally answer
it via email most within 48 hours. Additionally, all questions
and answers are conveniently available for viewing on the
website, which lists over 30 categories on a wide range of pet-
related issues. Subjects include allergies, fleas and ticks,
heartworms and bone and joint care.
Our Customers
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As of June 11, 2004, approximately 1,250,000 customers have
purchased from us within the last two years. We attracted
approximately 572,000 and 414,000 new customers in fiscal 2004
and 2003, respectively. Our customers are located throughout the
United States, with approximately 51% of customers residing in
California, Florida, Texas, New York, New Jersey, Pennsylvania,
and Virginia. The average retail purchase was approximately $73.
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, 2004, the majority of our sales
were made to retail customers with less than 1% of our sales made
to wholesale customers.
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, 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
the telephone and the Internet. We have used 30 and 15 second
television commercials to attract new customer orders, with the
tagline "your pet's same exact medications delivered to your
home, saving you time and money." Our television commercials
typically focus on our ability to rapidly deliver to customers
the same medications offered by veterinarians, but at reduced
prices. We generally purchase advertising on national cable
channels to target our key demographic groups. We believe that
television advertising is particularly effective and instrumental
in building brand awareness.
Direct Mailing and E-mailing
We use direct mailing and e-mailing to acquire customers and
to remind our existing customers to reorder.
3
Online Marketing
We supplement our traditional advertising with online
advertising and marketing efforts. We are members of the
LinkShare Network, which is an affiliate program with merchant
clients and affiliate websites. This network is designed to
develop and build a long-term, branded affiliate program in order
to increase online sales and establish an Internet presence. The
LinkShare Network enables us to establish link arrangements with
other websites, as well as portals and search engines. We also
make our brand available to internet consumers by purchasing
targeted keywords and achieving prominent placement on the top
search engines and search engine networks, including Google,
Microsoft Network, and Overture.
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 to obtain the
lowest cost. We purchase the majority of our health and
nutritional supplements directly from manufacturers. See Risk
Factors. Having strong relationships with product manufacturers
will ensure the availability of adequate volume of products
ordered by our customers, and will enable us to provide more and
better product information. While historically, substantially
all the major manufacturers of prescription and non-prescription
medications have declined to sell these products to direct
marketing companies. Part of our growth strategy includes
developing direct relationships with 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 our toll-free telephone number or visits our
website. The following information is needed to process
prescription orders: general pet information, prescription, and
the veterinarians name and phone number. This information is
entered into our computer system. Then our pharmacists and
pharmacy technicians verify all prescriptions. The order process
system checks for the verification for prescription medication
orders and a valid payment method for all orders. An invoice is
generated and printed in our fulfillment center, where items are
picked for shipping. The customer's order is then selected from
the Company's inventory and shipped via United States Priority
Mail, United Parcel Service, or Federal Express. Our customers
enjoy the convenience of rapid home delivery, with approximately
71% of all orders shipped within 24 hours of ordering. Our
website allows customers to easily browse and purchase
substantially all of our products and services online. Our
website is designed to be fast, secure and easy to use with order
and shipping confirmations, and with online order tracking
capabilities.
Warehousing and Shipping
We inventory our products and fill all customer orders from
our 40,000 square foot facility in Pompano Beach, Florida. We
have an in-house fulfillment and distribution operation, which is
used to manage the entire supply chain, beginning with the
placement of the order, continuing through order processing, and
then fulfilling and shipping of the product to the customer. We
offer a variety of shipping options, including next day delivery.
We ship to anywhere in the United States served by the United
States Postal Service, United Parcel Service, and Federal
Express. Priority orders are expedited in our fulfillment
process. Our goal is to ship the products the same day that the
order is received. For prescription medications, our goal is to
ship the product immediately after the prescription has been
authorized by the customer's veterinarian.
Customer Service and Support
We believe that a high level of customer service and support
is critical in retaining and expanding our customer base.
Customer 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 customers' e-mails
and calls that are related to order status, prices and shipping.
Our customer service representatives also respond to customers
through our 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 1.4% of total
sales.
4
Technology
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PetMed Express utilizes the latest integrated technologies in
call center, e-commerce, order entry, and inventory
control/fulfillment operations. Our systems are custom
configured by the Company to optimize our computer telephone
integration and mail order processing. The systems are designed
to maintain a large database of specialized information and
process a large volume of orders efficiently and effectively.
Our systems provide our agents with real time product
availability information and updated customer information to
enhance our customer service. We also have an integrated direct
connection for processing credit cards to ensure that a valid
credit card number and authorization have been received at the
same time our agents are on the phone with the customers. Our
information systems provide our agents with records of all prior
contact with a customer, including the customer's address, phone
number, e-mail address, fax number, prescription information,
order history, payment history and notes.
Competition
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The pet medications and health and nutritional supplements
market is competitive and highly fragmented. Our competitors
consist of veterinarians, traditional retailers, and other mail-
order and online retailers of 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 website 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 their 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.
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
143 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:
* "1-800-PetMeds" brand name;
* Quality customer service and support;
* Experienced management team;
* Consumer benefit structure of savings and convenience;
* Licensed pharmacy to conduct business in 49 states;
* Operating / technology infrastructure in place; and
* Multiple sources of supply for pet medications.
Intellectual Property
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We conduct our business under the trade name "1-800-PetMeds."
We believe this name, which is also our toll-free telephone
number, has added significant value and is an important factor in
the marketing of our products. We have also obtained the right
to the Internet addresses www.1800PetMeds.com,
www.1888PetMeds.com, www.petmedexpress.com, and www.petmeds.com.
As with phone numbers, we do not 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, and
have a trademark application pending for "1-800-PetMeds."
5
Government Regulation
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Dispensing prescription medications is governed at the state
level by the board of pharmacy, or similar regulatory agencies,
of each state where prescription medications are dispensed. We
are subject to regulation by the State of Florida and are
licensed by the Florida Board of Pharmacy. Our license is valid
until February 28, 2005. We are also licensed and/or regulated
by 48 other state pharmacy boards and other regulatory
authorities including, but not necessarily limited to, the United
States Food and Drug Administration ("FDA") and the United States
Environmental Protection Agency ("EPA"). As a licensed pharmacy
in the State of Florida, we are subject to the Florida Pharmacy
Act and regulations promulgated 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 pharmacy boards, or if we become
subject to actions by the FDA, or other enforcement regulators,
our distribution of prescription medications to pet owners could
cease, which could have a material adverse effect on our
operations. See Item 3. Legal Proceedings.
Employees
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The Company currently has 148 full time employees, and 36
temporary employees, including: 100 in sales and customer
service; 20 in fulfillment and purchasing; 53 in our pharmacy; 3
in information technologies; 3 in administrative positions; and 5
in management. None of the Company's employees are represented
by a labor union, nor governed by any collective bargaining
agreements. The Company reserves the right to hire the temporary
employees after a period of 3 months. The Company considers
relations with its employees as satisfactory.
Risk Factors
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You should carefully consider the risks and uncertainties
described below, and all the other information included in this
annual report before you decide to invest in our common stock.
Any of the following risks could materially adversely affect our
business, financial condition or operating results and could
result in a loss of your investment.
There can be no assurances that we can sustain profitable
operations in future periods.
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While we reported net income of $5,814,000, $3,258,000, and
$825,000 for the years ended March 31, 2004, 2003, and 2002,
respectively, we reported a net loss of approximately $2,827,000
for the year ended March 31, 2001. Our profitability during
fiscal 2004 was due in part to an increase in our revenues of
approximately $39,019,000, or approximately 71%, from fiscal
2003. There are no assurances we will continue to generate
revenues at this increased level, or that we will remain
profitable during fiscal 2005 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.
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The sale and delivery of prescription pet medications is
generally governed by state laws and state regulations. Since
our pharmacy is located in the State of Florida, 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 fines, or that
one or more of our pharmacy licenses may not be suspended or
revoked. See Item 3. Legal Proceedings.
Our alternate veterinarian program was discontinued and was under
investigation by the Florida Board of Pharmacy and Florida Agency
for Health Care Administration, and by various other state
pharmacy boards, which could reduce or eliminate our ability to
verify certain prescriptions outside the State of Florida.
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We utilized the services of alternate veterinarians to verify
certain prescriptions for animals residing outside the State of
Florida. The alternate veterinarian was not the veterinarian who
had actually seen the animal and may have resided in a different
state than the animal. In February 2002, we voluntarily ceased
the use of the alternate veterinarian program, and in March 2002,
a business decision was made to enter into a settlement agreement
with the Florida Board of Pharmacy. See Item 3. Legal
Proceedings. Many of the complaints related to prescriptions
verified through our alternate veterinarian program. The
alternate veterinarian program used a veterinarian outside the
State of Florida to verify certain prescriptions for pets outside
the State of Florida. The program was not used for pets residing
in the State of Florida. Future complaints may be brought
against the Company by states in which this program was utilized.
We are unable to assess the potential impact on our business or
any future penalties that may be assessed from these or other
complaints.
6
We currently purchase our prescription and non-prescription
medications from third party distributors and we are not an
authorized distributor of these products. We do not have any
guaranteed supply of these medications at any pre-established
prices.
- -----------------------------------------------------------------
For the fiscal year ended March 31, 2004 and 2003, the
majority of our sales were attributable to sales of prescription
and non-prescription medications. Historically, substantially
all the major pharmaceutical manufacturers have declined to sell
prescription and non-prescription pet medications directly to us.
In order to assure a supply of these products, we purchase
medications from various secondary sources, including a variety
of domestic distributors. Our business strategy includes seeking
to establish direct purchasing arrangements with major pet
pharmaceutical manufacturing companies. If we are not successful
in achieving this goal, we will continue to rely upon
distributors.
We cannot guarantee that if we continue to purchase
prescription and non-prescription pet medications from secondary
sources that we will be able to purchase an adequate supply to
meet our customers' demands, or that we will be able to purchase
these products at competitive prices. As these products
represent a significant portion of our sales, our failure to fill
customer orders for these products could adversely impact our
sales. If we should be forced to pay higher prices for these
products to ensure an adequate supply, we cannot guarantee that
we will be able to pass along to our customers any increases in
the prices we pay for these medications. This inability to pass
along increased prices 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, 2004. 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 30%, 29% and
34% of our sales for the fiscal years ended March 31, 2004, 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 affected.
Our success depends in part on the willingness of consumers to
purchase pet medications from us. If we do not succeed in
changing consumer-purchasing patterns, our results of operations
may be materially adversely affected.
- -----------------------------------------------------------------
The direct marketing of prescription and non-prescription pet
medications and health and nutritional supplements is relatively
new. Our success will depend upon our ability to engage
consumers who have historically purchased pet medications and
health and nutritional supplements from veterinarians. We may
not be able to convert a large number of these pet owners to our
customers. In order for us to be successful, many of these
consumers must be willing to utilize new ways of buying these
products. We cannot guarantee that we will be successful in
shifting these consumer purchasing patterns away from
veterinarians to us. If we do not attract consumers to purchase
these products from us, our results of operations may be
materially adversely affected.
In the past we have purchased medications from international
distributors and we did not always know if those distributors had
the authority of the manufacturer to sell the products in the
United States. As a result, we may be subject to future civil or
administrative actions regarding those products.
- -----------------------------------------------------------------
During fiscal 2002, a business decision was made to
discontinue purchasing any product from international
distributors. We have purchased a portion of our prescription
and non-prescription medications from international distributors
in the past. These medications may have been trademarked and/or
copyrighted products manufactured in foreign countries or in the
United States and sold by the manufacturer to foreign
distributors. Some of the prescription and non-prescription
medications may have been manufactured by entities, particularly
foreign licensees, who are not the licensors or owners of the
trademarks or copyrights for the medications. From time to time,
United States trademark and copyright holders, their licensees,
trade associations and the United States Customs Service have
brought forth litigation or administrative agency proceedings in
an attempt to halt the importation or sale of trademarked and/or
copyrighted products. The courts remain divided on the extent to
which trademark, copyright or other laws, rules, regulations or
decisions may restrict the importation or sales of this
merchandise without the consent of the trademark or copyright
owner. See Item 3. Legal Proceedings.
7
Significant portions of our sales are made to residents of seven
states. If we should lose our pharmacy license in one or more of
these states, our financial condition and results of operations
would be materially adversely affected.
- -----------------------------------------------------------------
While we ship pet medications to customers in all 50 states,
approximately 51% of our sales for the fiscal year ended March
31, 2004 were made to customers located in the states of
California, Florida, Texas, New York, New Jersey, Pennsylvania,
and Virginia. If for any reason our license to operate a
pharmacy in one or more of those states should be suspended or
revoked, or if it is not renewed, our financial condition and
results of operations may be materially adversely affected.
We face significant competition from veterinarians and
traditional and online retailers and may not be able to
profitably compete with them.
- -----------------------------------------------------------------
We compete directly and indirectly with veterinarians 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 website.
Traditional retailers may hold a competitive advantage over us
because pet owners may prefer to purchase these products from a
store instead of online or through 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 website could expose us to various kinds of
liability, which, if prosecuted successfully, could negatively
impact our business.
- -----------------------------------------------------------------
Because we post product information and other content on our
website, we face potential liability for negligence, copyright
infringement, patent infringement, trademark infringement,
defamation and other claims based on the nature and content of
the materials we post. Various claims have been brought, and
sometimes successfully prosecuted, against Internet content
distributors. We could be exposed to liability with respect to
the unauthorized duplication of content or unauthorized use of
other parties' proprietary technology. Although we maintain
general liability insurance, our insurance may not cover
potential claims of this type, or may not be adequate to
indemnify us for all liability that may be imposed. Any
imposition of liability that is not covered by insurance, or is
in excess of insurance coverage, could materially adversely
affect our financial condition and results of operations.
We may not be able to protect our intellectual property rights,
and we may be found to infringe on the proprietary rights of
others.
- -----------------------------------------------------------------
We rely on a combination of trademark, trade secret, copyright
laws and contractual restrictions to protect our intellectual
property. These afford only limited protection. Despite our
efforts to protect our proprietary rights, unauthorized parties
may attempt to copy our non-prescription private label generic
equivalents, when and if developed, as well as aspects of our
sales formats, or to obtain and use information that we regard as
proprietary, including the technology used to operate our
website, our content and our trademarks.
Litigation or proceedings before the United States Patent and
Trademark Office may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets and
domain names, and to determine the validity and scope of the
proprietary rights of others. Any litigation or adverse priority
proceeding could result in substantial costs and diversion of
resources, and could seriously harm our business and operating
results.
Third parties may also claim infringement by us with respect
to past, current or future technologies. We expect that
participants in our markets will be increasingly involved in
infringement claims as the number of services and competitors in
our industry segment grows. Any claim, whether meritorious or
not, could be time consuming, result in costly litigation, cause
service upgrade delays or require us to enter into royalty or
licensing agreements. These royalty or licensing agreements
might not be available on terms acceptable to us or at all.
8
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.
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 ability to obtain new customers at a reasonable cost,
retain existing customers, or encourage reorders;
* Our ability to increase the number of visitors to our
website, or our ability to convert visitors to our
website into customers;
* The mix of medications and other pet products sold by us;
* Our ability to manage inventory levels;
* Our ability to adequately maintain, upgrade and develop
our website, the systems that we use to process
customers' orders and payments, or our computer network;
* Increased competition within our market niche;
* Price competition;
* Increases in the cost of advertising;
* The amount and timing of operating costs and capital
expenditures relating to expansion of our product line
or operations; and
* Disruption of our toll-free telephone service, technical
difficulties, systems and Internet outages or slowdowns.
Any change in one or more of these factors could materially
adversely affect our results of operations in future periods.
Our stock price fluctuates from time to time and may fall below
expectations of securities analysts and investors, and could
subject us to litigation, which may result in you suffering a
loss on your investment.
- -----------------------------------------------------------------
The market price of our common stock may fluctuate
significantly in response to a number of factors, some of which
are beyond our control. These factors include: quarterly
variations in operating results; changes in accounting treatments
or principles; announcements by us or our competitors of new
products and services offerings, significant contracts,
acquisitions or strategic relationships; additions or departures
of key personnel; any future sales of our common stock or other
securities; stock market price and volume fluctuations of
publicly-traded companies; and general political, economic and
market conditions.
9
In some future quarter our operating results may fall below
the expectations of securities analysts and investors, which
could result in a decrease in the trading price of our common
stock. In the past, securities class action litigation has often
been brought against a company following periods of volatility in
the market price of its securities. We may be the targets of
similar litigation in the future. Securities litigation could
result in substantial costs and divert management's attention and
resources, which could seriously harm our business and operating
results.
The interest of our controlling stockholder could conflict with
those of our other stockholders.
- -----------------------------------------------------------------
Tricon Holdings, LLC, ("Tricon") our principal shareholder,
own and control 31.4% of our voting securities. This shareholder
is able to influence the outcome of stockholder votes, including
votes concerning: the election of directors; amendments to our
charter and by-laws; and the approval of significant corporate
transactions such as a merger or sale of our assets. This
controlling influence could have the effect of delaying or
preventing a change in control, even if many of our stockholders
believe it is in their best interest.
We may issue additional shares of preferred stock that could
defer a change of control or dilute the interests of our common
stockholders. Our charter documents could defer a takeover
effort which could inhibit your ability to receive an acquisition
premium for your shares.
- -----------------------------------------------------------------
Our charter permits our Board of Directors to issue up to
5,000,000 shares of preferred stock without 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. Properties.
Our facilities, including our principal executive offices are
located at 1441 SW 29th Avenue, Pompano Beach, FL 33069. On May
31, 2001, the Company sold its 50,000 square foot office
building, which houses the Company's principal executive offices
and warehouse, to an unrelated third party. The Company received
gross proceeds of $2,150,000, of which approximately $1,561,000
was used to pay off the mortgage, and the Company recognized a
loss on the sale of approximately $185,000. The Company then
entered into a five-year term lease agreement for 20,000 of the
50,000 square foot Pompano Beach office building. On February
22, 2002, the Company entered into a lease addendum which added
approximately 12,000 square feet, effective June 1, 2002, to
accommodate the Company's warehouse expansion. On July 25, 2003
the Company signed an amendment to its current lease agreement to
obtain an additional 8,000 square feet, with an option to add
another 3,600 square feet, to its current 32,000 square foot
facility, which became available on October 1, 2003. This
addition to the warehouse was necessary to increase the Company's
capacity to store additional inventory during our peak season.
The future minimum annual lease payments as of March 31, 2004,
are as follows: $383,000 for fiscal 2005, $398,000 for fiscal
2006, and $67,000 for fiscal 2007.
Item 3. Legal Proceedings.
Various complaints had been filed with the Florida Board of
Pharmacy between November 2000 and March 2002. These complaints,
the majority of which were filed by veterinarians who are in
competition with the Company for the sale of pet prescription-
required products, alleged violations of the Pharmacy Practice
Act and regulations promulgated there under. The vast majority
of the complaints alleged that the Company, through its
pharmacists, improperly dispensed prescription-required
veterinary medication based on prescriptions verified through the
Company's discontinued alternate veterinarian program. The
alternate veterinarian program used a veterinarian outside the
State of Florida to verify certain prescriptions for pets outside
the State of Florida. While the program was not used for pets
residing in the State of Florida, the complaints had, for the
most part, been filed with the Florida Board of Pharmacy. Other
complaints alleged the dispensing of medication without a valid
prescription, the sale of non-conforming products and that the
Company's pharmacy was operating at the same location as another
pharmacy, with which it had a contractual relationship. The
Company contested all allegations and continued discussions in an
attempt to reach a resolution of these matters.
In February 2002, the Company voluntarily ceased the use of
its alternate veterinarian program, and in March 2002 a business
decision was made to enter into a settlement agreement with the
Florida Board of Pharmacy, rather than to proceed with costly and
lengthy litigation. In April 2002, the Florida Board of Pharmacy
approved the settlement agreement. The Florida Board of Pharmacy
did not reach any finding of fact or conclusion of law that the
Company committed any wrongdoing or violated any rules or laws
governing the practice of pharmacy. According to the settlement
agreement, the Company's pharmacy license was placed on probation
for a period of three years and the Company, the Company's
pharmacists and contracted pharmacy and pharmacist, paid
approximately $120,000 in fines and investigative costs in July
2002. Based on its demonstrated compliance with pharmacy rules
and laws, effective March 11, 2004, PetMed Express was released
from probation over one year early by the Florida Board of
Pharmacy. The Company remains licensed with the State of Florida
and continues to operate its principal business in Florida.
The Company has settled other complaints that had been filed
with various other states' pharmacy boards in the past. There
can be no assurances made that other states will not attempt to
take similar actions against the Company in the future.
10
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 which was paid in September 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 purported to assert seven claims related to
the Company's alleged sale of pet medications produced for a
Novartis Australian sister company: Count I: Infringement of
Registered Trademark Under Section 32 of the Lanham Act, 15
U.S.C. 1114; Count II: Infringement of Unregistered Trademarks
Under Section 43(a) of the Lanham Act, 15 U.S.C. 1125(a); Count
III: False Advertising Under Section 43(a) of the Lanham Act, 15
U.S.C. 1125(a); Count IV: Misleading Advertising Under Florida
Statutory Law; Count V: Deceptive and Unfair Trade Practices
Under Florida Statutory Law; Count VI: Injury to Business
Reputation Under Florida Statutory Law; Count VII: Common Law
Unfair Competition. Subsequent to the year ended March 31, 2003,
the Company reached a final settlement agreement with Novartis.
According to the confidential settlement agreement dated April 7,
2003, the Company had satisfactorily resolved the contested
issues raised by the complaint and the confidential settlement
terms had no material impact on the Company's operations and
financial results.
The Company is a defendant in a lawsuit, filed in August 2002,
in Texas state district court seeking injunctive and monetary
relief styled Texas State Board of Pharmacy and State Board of
Veterinary Medical Examiners v. PetMed Express, Inc. Cause No.GN-
202514, in the 201st Judicial District Court, Travis County,
Texas. The Company in its initial pleading denied the
allegations contained therein. The Company will vigorously
defend, is confident of its compliance with the applicable law,
and finds wrong-on-the-facts the vast majority of the allegations
contained in the Plaintiffs' supporting documentation attached to
the lawsuit. Discovery has commenced and at this stage of the
litigation it is difficult to assess any possible outcome or
estimate any potential loss in the event of an adverse outcome.
Routine Proceedings
- -------------------
The Company is a party to routine litigation and administrative
complaints incidental to its business. Management does not
believe that the resolution of any or all of such routine
litigation and administrative complaints are likely to have a
material adverse effect on the Company's financial condition or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of our shareholders during
the fourth quarter of the fiscal year ended March 31, 2004.
11
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.
The Company's common shares are traded on the Nasdaq
National Market ("NASDAQ") under the symbol "PETS." The prices
set forth below reflect the range of high and low closing prices
per share in each of the quarters of fiscal 2004 and 2003 as
reported by the NASDAQ and the over-the-counter bulletin board
("OTCBB").
Fiscal 2004: High Low
- ----------- ------ ------
First Quarter $ 5.00 $ 2.27
Second Quarter $ 8.15 $ 5.24
Third Quarter $ 9.23 $ 7.00
Fourth Quarter $12.96 $ 7.05
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
There were 68 holders of record of our common stock at May 31,
2004, and we estimate there were approximately 3,200 beneficial
shareholders on that date.
Recent Sales of Unregistered Securities
- ---------------------------------------
In July 2003, we issued 59,583 shares of the Company's common
stock to one company upon the cashless exercise of options.
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.
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, 2004:
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------
Number of securities
to be issued upon Weighted average
exercise of outstanding exercise price of Number of securities
options, warrants outstanding options, remaining available
Plan category and rights warrants and rights for future issuance
- ----------------------------------------------------------------------------------------------------
(a) (b) (c)
1998 Stock Option Plan 1,974,337 $ 2.63 3,025,663
Equity compensation plans
not approved by security
holders (1) 45,000 $ 1.33 -
--------- ---------
Total 2,019,337 3,025,663
========= =========
(1) Represents non-plan options to purchase an aggregate of
45,000 shares of our common stock issued to a member of our
management.
12
Item 6. Selected Financial Data.
The following selected financial data should be read together
with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements
and notes thereto and other financial information included
elsewhere in this prospectus. The consolidated statements of
operations data set forth below for the fiscal years ended March
31, 2004, 2003, and 2002 and the consolidated balance sheet data
as of March 31, 2004 and 2003 have been derived from our audited
consolidated financial statements which are included elsewhere in
this Form 10-K. The consolidated statements of operations data
set forth below for the fiscal years ended March 31, 2001 and
2000 and the consolidated balance sheet data as of March 31,
2002, 2001 and 2000 have been derived from our audited
consolidated financial statements which are not included in this
Form 10-K.
STATEMENTS OF OPERATIONS
Year Ended March 31,
-------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Sales $93,994,233 $54,974,916 $32,025,931 $10,006,285 $14,667,146
Cost of sales 55,824,406 31,517,639 18,894,493 6,367,604 8,496,316
Gross profit 38,169,827 23,457,277 13,131,438 3,638,681 6,180,830
Operating expenses 28,958,433 19,974,270 12,383,498 6,277,779 7,766,385
Net income (loss) 5,813,604 3,257,565 825,413 (2,826,707) (1,794,237)
Net income (loss) per
common share:
Basic 0.30 0.19 0.05 (0.28) (0.28)
Diluted 0.25 0.16 0.04 (0.28) (0.28)
Weighted average number of
common shares outstanding:
Basic 19,471,681 17,300,130 16,360,010 9,943,625 6,369,822
Diluted 23,689,866 20,749,515 19,739,493 9,943,625 6,369,822
BALANCE SHEET DATA
March 31,
-------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Working capital (deficit) $11,338,004 $ 3,017,641 $ 690,588 $(2,473,349) $ 398,218
Total assets 18,480,808 9,025,796 4,654,236 4,504,757 6,326,435
Total liabilities 4,486,299 3,433,108 3,071,536 3,747,470 4,695,583
Shareholders' equity 13,994,509 5,592,688 1,582,700 757,287 1,630,852
See Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities,
for a discussion on the Company's dividend policy.
13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Executive Summary
- -----------------
PetMed Express was incorporated in the State of Florida in
January 1996. The Company began selling pet medications and
products in September 1996, and issued its first catalog in the
fall of 1997. This catalog displayed approximately 1,200 items,
including prescription and non-prescription pet medications, 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 markets its products through national
television, online and direct mail advertising campaigns, which
directs the consumers to order by phone or on the Internet, and
aim to increase recognition of the "1-800-PetMeds" brand name.
We currently generate approximately 50% of all sales via the
Internet.
The Company's sales consist of products sold primarily to
retail consumers and minimally to wholesale customers.
Typically, the Company's customers pay by credit card or check at
the time the order is shipped. The Company usually receives cash
settlement in one to three banking days for sales paid for by
credit cards, which minimizes the accounts receivable balances
relative to the Company's sales. For the fiscal year ended March
31, 2004 and 2003, the Company's sales returns average was
approximately 1.4 % and 1.6% of sales, and the average purchase
was approximately $73 and $71 per order, respectively.
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 Ended March 31,
2004 2003 2002
----- ----- -----
Sales 100.0 % 100.0 % 100.0 %
Cost of sales 59.4 57.3 59.0
----- ----- -----
Gross profit 40.6 42.7 41.0
----- ----- -----
Operating expenses:
General and administrative 11.4 14.5 19.0
Advertising 18.8 21.2 17.9
Severance charges - - 0.6
Depreciation and amortization 0.6 0.7 1.2
----- ----- -----
Total operating expenses 30.8 36.4 38.7
----- ----- -----
Income from operations 9.8 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 9.8 6.3 2.6
Provision for income taxes 3.6 0.4 -
----- ----- -----
Net income 6.2 % 5.9 % 2.6 %
===== ===== =====
14
Fiscal 2004 Compared to Fiscal 2003
- -----------------------------------
Sales
- -----
Sales increased $39,019,000, or 71.0%, to $93,994,000 for the
year ended March 31, 2004, from $54,975,000 for the year ended
March 31, 2003. The increase in sales can be primarily
attributed to increased retail reorders and the positive effects
generated from our advertising campaign. Additionally, the
Company's free shipping promotion, which was initiated in March
2003, had a positive impact on sales.
The Company has committed certain amounts specifically
designated towards television and direct mail advertising to
stimulate sales, create brand awareness, and acquire new
customers. Retail new order sales have increased by
approximately $13,201,000, or 45.7%, to approximately $42,116,000
for the fiscal year ended March 31, 2004, from approximately
$28,915,000 for the fiscal year ended March 31, 2003. Retail
reorder sales have increased by approximately $25,607,000, or
99.1%, to approximately $51,434,000 for the fiscal year ended
March 31, 2004, from approximately $25,827,000 for the fiscal
year ended March 31, 2003. Wholesale sales have increased by
approximately $211,000, or 91.5%, to approximately $444,000 for
the fiscal year ended March 31, 2004, from approximately $233,000
for the fiscal year ended March 31, 2003. The Company acquired
approximately 572,000 new customers for the year ended March 31,
2004, compared to 414,000 new customers for the same period in
the prior year.
The majority of our product sales are affected by the seasons,
due to the seasonality of mainly heartworm and flea and tick
medications. Industry seasonality trends, according to Fountain
Agricounsel LLC, Management Consultants to Agribusiness, are
divided into percentage of industry sales by quarter. For the
quarters ended March 31, June 30, September 30, and December 31
industry sales are 19%, 37%, 28%, and 16%, respectively. The
Company cannot accurately predict future sales, however, based on
current circumstances the Company does not expect a significant
variance compared to the industry trends in the first quarter of
fiscal 2005.
Cost of sales
- -------------
Cost of sales increased by $24,306,000, or 77.1%, to
$55,824,000 for the fiscal year ended March 31, 2004, from
$31,518,000 for the fiscal year ended March 31, 2003. The
increase in cost of sales is directly related to the increase in
retail sales in fiscal 2004 as compared to 2003. As a percent of
sales, the cost of sales was 59.4% in fiscal 2004, as compared to
57.3% in fiscal 2003. This percentage increase can be directly
attributed to the Company's free shipping promotion, with a
portion offset by increases in our product pricing.
Gross profit
- ------------
Gross profit increased by $14,713,000, or 62.7%, to $38,170,000
for the fiscal year ended March 31, 2004 from $23,457,000 for the
fiscal year ended March 31, 2003. Gross profit as a percentage
of sales for fiscal 2004 and 2003 was 40.6% and 42.7%,
respectively. This percentage decrease can be directly
attributed to the Company's free shipping promotion, with a
portion offset by increases in our product pricing.
General and administrative expenses
- -----------------------------------
General and administrative expense increased by $2,797,000, or
35.2%, to $10,754,000 for the fiscal year ended March 31, 2004
from $7,957,000 for the fiscal year ended March 31, 2003.
However, general and administrative expense as a percentage of
sales was 11.4% and 14.5% for the fiscal years ended March 31,
2004 and 2003, respectively. The increase in general and
administrative expense for the year ended March 31, 2004 was
primarily due to the following: a $1,265,000 increase to payroll
expenses which can be attributed to the addition of new employees
in the customer service and pharmacy departments, which enabled
the company to sustain its continued growth; a $792,000 increase
to bank service and credit card fees which can be directly
attributed to increased sales in fiscal 2004; a $357,000 increase
to professional fees, of which $107,000 related to NASDAQ listing
fees; a $151,000 increase to telephone expenses which is directly
attributed to increased sales in fiscal 2004; a $148,000 increase
in insurance expenses, which related to additional premium paid
for property insurance on our increased inventory and directors
and officer insurance; and a $84,000 increase in other expenses
which includes mainly property, and other related office
expenses.
Advertising expenses
- --------------------
Advertising expenses increased by approximately $6,004,000, or
approximately 51.5%, to approximately $17,654,000 for the fiscal
year ended March 31, 2004 from approximately $11,650,000 for the
fiscal year ended March 31, 2003. The increase in advertising
expense for the fiscal year ended March 31, 2004 was due to the
Company's plan to commit certain amounts specifically designated
towards television and direct mail advertising to stimulate
sales, create brand awareness, and acquire new customers. As a
percent of sales, advertising expense was 18.8% in fiscal 2004,
as compared to 21.2% in fiscal 2003. The Company expects
advertising as a percent of sales to range approximately from
18.0% to 22.0% in fiscal 2005. However that advertising
percentage will fluctuate quarter to quarter due to seasonality
and advertising availability.
15
Depreciation and amortization
- -----------------------------
Depreciation and amortization increased by approximately
$182,000, or 49.7%, to approximately $550,000 for the fiscal year
ended March 31, 2004 from approximately $368,000 for the fiscal
year ended March 31, 2003. The increase to depreciation and
amortization expense for fiscal 2004 can be attributed to
increased property and equipment additions mainly related to the
Company's warehouse expansion.
Gain or loss on disposal of property and equipment
- --------------------------------------------------
In fiscal 2003, the Company recorded a gain on disposal of
computer equipment of $15,000. The fully depreciated computer
equipment was sold to an unrelated third party and the Company
received gross proceeds of $15,000. There was no related gain or
loss on disposal of property and equipment in fiscal 2004.
Interest Expense
- ----------------
Interest expense decreased by approximately $16,000, or 52.6%,
to approximately $15,000 for the fiscal year ended March 31, 2004
from approximately $31,000 for the fiscal year ended March 31,
2003. The $15,000 decrease can be attributed to a reduction of
the utilization of the Company's $5,000,000 line of credit.
Interest expense may increase in future quarters, due to the
Company utilizing its $5,000,000 line of credit to increase
inventory levels.
Provision for income taxes
- --------------------------
The Company had incurred significant net losses since its
inception in 1996, through the quarter ended June 30, 2001.
These losses have resulted in net operating loss carryforwards,
which have been used by the Company to offset its tax
liabilities. For the fiscal year ended March 31, 2002, the
Company recorded a full valuation allowance against the deferred
income tax assets, created by net operating losses, since future
utilization of these assets was subject to the Company's ability
to generate taxable income. For the fiscal year ended March 31,
2003, the Company recognized a deferred income tax asset of
approximately $581,000, due to the fact that the Company had
demonstrated the ability to generate taxable income. The use of
future net operating loss carryforwards is limited to
approximately $266,000 annually; due to the November 22, 2000
change of control. There are no guarantees that the Company will
be able to utilize all future net operating loss carryforwards,
unless the Company generates taxable income. For the fiscal
years ended March 31, 2004 and 2003, the Company recorded an
income tax provision for approximately $3,400,000 and $223,000,
respectively. The effective tax rate for fiscal 2004 was 36.9%
compared to 6.4% for fiscal 2003. This difference is primarily
due to the utilization of prior net operating losses, which
offset taxable income for the period, and the recognition of the
deferred tax asset in fiscal 2003. Upon recognition of the
$581,000 deferred income tax asset, the Company reduced its
income tax provision by the same amount. This income tax
provision reduction was a tax benefit, which increased net
income.
Net income
- ----------
Net income increased by approximately $2,556,000, or 78.5%, to
$5,814,000 net income for the fiscal year ended March 31, 2004
from $3,258,000 net income for the fiscal year ended March 31,
2003. The significant increase was mainly attributable to the
Company's sales growth and profitable operations.
16
Fiscal 2003 Compared to Fiscal 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.
17
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, 2004 was
$11,338,000, as compared to the $3,018,000 at March 31, 2003, an
increase of approximately $8,320,000. The increase in working
capital was primarily attributable to cash flow generated from
operations and the exercise of stock options. Net cash provided
by operating activities was $1,106,000 and $970,000 for the years
ended March 31, 2004 and 2003, respectively. Net cash used in
investing activities was $742,000 and $1,095,000 for the years
ended March 31, 2004 and 2003, respectively. This $353,000
decrease relates directly to the intangible asset acquisition in
fiscal 2003. Net cash provided by financing activities was
$1,931,000 and $371,000 for the years ended March 31, 2004 and
2003. This $1,560,000 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.
18
Since its 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, 2004 and 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
25, 2003 the Company signed an amendment to its current lease
agreement to obtain an additional 8,000 square feet, with an
option to add another 3,600 square feet, to its current 32,000
square foot facility, which became available on October 1, 2003.
This addition to the warehouse was necessary to increase the
Company's capacity to store additional inventory during our peak
season.
On 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% (5.0% and 5.25% at
May 31, 2004 and 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.
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. On August 28, 2003, the Company signed an amendment to
their existing line of credit agreement, which extended the line
of credit from $2,000,000 up to $5,000,000. The Company's
$5,000,000 line of credit is effective through August 28, 2004,
and the interest rate is at the published thirty day London
Interbank Offered Rates ("LIBOR") plus 2.40% (3.50% and 3.92% at
March 31, 2004 and 2003, respectively), and contains various
financial and operating covenants. At March 31, 2004 and 2003,
there was no balance outstanding under the line of credit
agreement.
Presently, the Company has approximately $350,000 planned for
capital expenditure commitments to further the Company's growth
during fiscal 2005, which will be funded through cash from
operations. The Company's sources of working capital include the
line of credit, cash from operations, and the exercise of stock
options and warrants. The Company presently has no need for
other alternative sources of working capital. 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 on 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 7A. Quantitative and Qualitative Disclosures About Market
Risk.
Market risk generally represents the risk that losses may
occur in the value of financial instruments as a result of
movements in interest rates, foreign currency exchange rates and
commodity prices. Our financial instruments include cash and
cash equivalents, accounts receivable, accounts payable, line of
credit, and debt obligations. The book values of cash
equivalents, accounts receivable, and accounts payable are
considered to be representative of fair value because of the
short maturity of these instruments. We estimate that the fair
value of all of our debt obligations approximate $68,000 as of
March 31, 2004.
We do not utilize financial instruments for trading purposes
and we do not hold any derivative financial instruments that
could expose us to significant market risk. Our exposure to
market risk for changes in interest rates relates primarily to
our obligations under our line of credit. As of June 11, 2004,
there was no outstanding balance under the line of credit
agreement. A ten percent increase in short-term interest rates
on the variable rate debts outstanding as of June 11, 2004 would
not have a material impact on our annual interest expense,
assuming the amount of debt outstanding remains constant.
The above sensitivity analysis for interest rate risk excludes
accounts receivable, accounts payable and accrued liabilities
because of the short-term maturity of such instruments. The
analysis does not consider the effect this movement may have on
other variables including changes in revenue volumes that could
be indirectly attributed to changes in interest rates. The
actions that management would take in response to such a change
are also not considered. If it were possible to quantify this
impact, the results could well be different than the sensitivity
effects shown above.
19
Item 8. Financial Statements and Supplementary Data.
The financial statements of the Company and the related notes
are set forth at pages F-1 through F-17, herein.
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
The Company's management, including our Chief Executive
Officer and Chief Financial Officer, has conducted an evaluation
of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-14(c)
promulgated under the Securities Exchange Act of 1934, as
amended) as of the year ended March 31, 2004, the end of the
period covered by this report (the "Evaluation Date"). Based
upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and
procedures are effective for timely gathering, analyzing and
disclosing the information we are required to disclose in our
reports filed under the Securities Exchange Act of 1934, as
amended. There have been no significant changes made in our
internal controls or in other factors that could significantly
affect our internal controls over financial reporting during the
period covered by this report.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is included in our
definitive proxy statement for our 2004 annual meeting of
stockholders to be held on August 6, 2004, and is incorporated
herein by reference.
Item 11. Executive Compensation.
The information required by this item is included in our
definitive proxy statement for our 2004 annual meeting of
stockholders to be held on August 6, 2004, and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
The information required by this item (other than information
required by Item 201(d) of Regulation S-K with respect to equity
compensation plans, which is set forth under Item 5 of this
Annual Report on Form 10-K) is included in our definitive proxy
statement for our 2004 annual meeting of stockholders to be held
on August 6, 2004, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is included in our
definitive proxy statement for our 2004 annual meeting of
stockholders to be held on August 6, 2004, and is incorporated
herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this item is included in our
definitive proxy statement for our 2004 annual meeting of
stockholders to be held on August 6, 2004, and is incorporated
herein by reference.
20
PART IV
Item 15. Exhibits, Financial Statement Schedules, 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. (1).
10.10 Amendment to Third Line of Credit ($5,000,000)
Agreement with SouthTrust Bank, N.A. (incorporated by
reference to Exhibit 10.10 of the Registrant's Form 10-Q
on November 7, 2003, Commission File No. 000-28827).
10.11 Amendment Number 1 to Executive Employment Agreement
with Menderes Akdag (incorporated by reference to
Exhibit 99.1 of the Registrant's Form 8-K on March 16,
2004, Commission File No. 000-28827).*
(14) Corporate Code of Ethics
14.1 Corporate Code of Ethics (incorporated by reference in
our definitive proxy statement for our 2004 annual
meeting of stockholders to be held on August 6, 2004).
(21) Subsidiaries of Registrant.
21.1 Subsidiaries of Registrant (filed herewith).
21
(31) Certifications.
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, promulgated
under the Securities Exchange Act of 1934, as amended
(filed herewith to Exhibit 31.1 of the Registrant's Report
on Form 10-K for the year ended March 31, 2004, Commission
File No. 000-28827).
31.2 Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, promulgated
under the Securities Exchange Act of 1934, as amended
(filed herewith to Exhibit 31.2 of the Registrant's Report
on Form 10-K for the year ended March 31, 2004, Commission
File No. 000-28827).
(32) Certifications.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (filed herewith to Exhibit 32.1 of the
Registrant's Report on Form 10-K for the year ended March
31, 2004, Commission File No. 000-28827).
(1) Incorporated by reference to the Registration Statement
on Form 10-SB, File No. 000-28827, as amended, as filed
with the Securities and Exchange Commission.
(b) Reports on Form 8-K.
1) On January 21, 2004 the Company filed a report under Items
7 and 9 disclosing the Company's acceptance on the NASDAQ
National Market.
2) On January 26, 2004 the Company filed a report under Items
7 and 9 disclosing a press release reporting its financial
results for the quarter ended December 31, 2003.
3) On February 9, 2004 the Company filed a report under Items
7 and 9 disclosing its conference call transcript for the
quarter ended December 31, 2003.
4) On March 16, 2004 the Company filed a report under Items
5 disclosing the amendment to the CEO's executive
employment agreement.
5) On March 16, 2004 the Company filed a report under Items 5
disclosing the exercise of Tricon Holdings LLC warrants.
22
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 11, 2004 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 11, 2004.
SIGNATURE TITLE
/s/ Menderes Akdag Chief Executive Officer
- --------------------------- (principal executive officer)
Menderes Akdag Officer and Director
/s/ Marc Puleo, M.D. Chairman of the Board and
- --------------------------- President
Marc Puleo, M.D. Officer and Director
/s/ Bruce S. Rosenbloom Chief Financial Officer and
- --------------------------- Treasurer
Bruce S. Rosenbloom (principal financial and accounting
officer)
Officer
/s/ Robert C. Schweitzer Director
- ---------------------------
Robert C. Schweitzer
/s/ Ronald J. Korn Director
- ---------------------------
Ronald J. Korn
/s/ Gian Fulgoni Director
- ---------------------------
Gian Fulgoni
/s/ Frank J. Formica Director
- ---------------------------
Frank J. Formica
23
====================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
PETMED EXPRESS, INC.
_______________________
Form 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED:
MARCH 31, 2004
_______________________
CONSOLIDATED FINANCIAL STATEMENTS
_______________________
====================================================================
PETMED EXPRESS, INC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm...... F-2
Consolidated Balance Sheets as of March 31, 2004 and
March 31, 2003............................................. F-3
Consolidated Statements of Income for each of the three
years in the period ended March 31, 2004................... F-4
Consolidated Statements of Changes in Shareholders'
Equity for each of the three years in the period ended
March 31, 2004............................................. F-5
Consolidated Statements of Cash Flows for each of the
three years in the period ended March 31, 2004............ F-6
Notes to Consolidated Financial Statements................... F-7 - F-17
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
PetMed Express, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
PetMed Express, Inc. and Subsidiaries (the "Company") as of March
31, 2004 and 2003, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each
of the three years in the period ended March 31, 2004. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of PetMed Express, Inc. and Subsidiaries as of
March 31, 2004 and 2003, and the results of their operations and
their cash flows for each of the three years in the period ended
March 31, 2004, in conformity with U.S. generally accepted
accounting principles.
April 30, 2004 /s/ Goldstein Golub Kessler LLP
New York, New York -------------------------------
Goldstein Golub Kessler LLP
F-2
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
2004 2003
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,278,926 $ 984,169
Accounts receivable, less allowance for doubtful
accounts of $22,987 and $16,644, respectively 1,133,301 651,883
Inventories - finished goods 11,179,858 4,268,146
Prepaid expenses and other current assets 232,218 478,108
------------ -----------
Total current assets 15,824,303 6,382,306
Property and equipment, net 1,688,327 1,496,979
Deferred income taxes 581,356 581,356
Intangible asset 365,000 365,000
Other assets 21,822 200,155
------------ -----------
Total assets $ 18,480,808 $ 9,025,796
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,273,062 $ 2,570,459
Income taxes payable 422,445 170,752
Accrued expenses and other current liabilities 722,350 555,012
Current portion of loan obligation 68,442 68,442
------------ -----------
Total current liabilities 4,486,299 3,364,665
Loan obligation, less current portion - 68,443
------------ -----------
Total liabilities 4,486,299 3,433,108
------------ -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized; 2,500 convertible shares
issued and outstanding with a liquidation
preference of $4 per share 8,898 8,898
Common stock, $.001 par value, 40,000,000
shares authorized; 21,860,057 and 18,460,878
shares issued and outstanding, respectively 21,860 18,461
Additional paid-in capital 9,864,025 7,279,207
Retained earnings (accumulated deficit) 4,099,726 (1,713,878)
------------ -----------
Total shareholders' equity 13,994,509 5,592,688
------------ -----------
Total liabilities and shareholders' equity $ 18,480,808 $ 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,
2004 2003 2002
------------- ------------ ------------
Sales $ 93,994,233 $ 54,974,916 $ 32,025,931
Cost of sales 55,824,406 31,517,639 18,894,493
------------ ----------- -----------
Gross profit 38,169,827 23,457,277 13,131,438
------------ ----------- -----------
Operating expenses:
General and administrative 10,754,427 7,956,786 6,094,493
Advertising 17,653,614 11,649,811 5,717,242
Severance charges - - 195,000
Depreciation and amortization 550,392 367,673 376,763
------------ ----------- -----------
Total operating expenses 28,958,433 19,974,270 12,383,498
------------ ----------- -----------
Income from operations 9,211,394 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 (14,546) (30,658) (48,835)
Interest income 9,739 6,973 18,582
Other, net 6,938 6,084 77,058
------------ ----------- -----------
Total other income (expense) 2,131 (2,601) 77,473
------------ ----------- -----------
Income before provision for income taxes 9,213,525 3,480,406 825,413
Provision for income taxes 3,399,921 222,841 -
------------ ----------- -----------
Net income $ 5,813,604 $ 3,257,565 $ 825,413
============ =========== ===========
Net income per common share:
Basic $ 0.30 $ 0.19 $ 0.05
============ =========== ===========
Diluted $ 0.25 $ 0.16 $ 0.04
============ =========== ===========
Weighted average number of common
shares outstanding:
Basic 19,471,681 17,300,130 16,360,010
============ =========== ===========
Diluted 23,689,866 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, 2002, March 31, 2003 and March 31, 2004
Retained
Convertible Common Additional Earnings
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
Issuance of common
stock from exercise of
stock options - - 1,179,596 1,179 1,285,366 - 1,286,545
Issuance of common
stock from exercise of
warrants - - 2,219,583 2,220 710,580 - 712,800
Tax benefit related to
stock options exercised - - - - 588,872 - 588,872
Net income - - - - - 5,813,604 5,813,604
------ ------ ---------- ------- ---------- ----------- ----------
Balance, March 31, 2004 2,500 $ 8,898 21,860,057 $ 21,860 $ 9,864,025 $ 4,099,726 $13,994,509
====== ====== ========== ======= ========== =========== ==========
See accompanying notes to consolidated financial statements
F-5
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
2004 2003 2002
------------- ------------ ------------
Cash flows from operating activities:
Net income $ 5,813,604 $ 3,257,565 $ 825,413
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 550,392 367,673 376,763
Tax benefit related to stock
options exercised 588,872 171,587 -
(Gain) loss on disposal of property
and equipment - (15,000) 314,332
Deferred income taxes - (581,356) -
Amortization of deferred membership
fee revenue - - (140,048)
Bad debt expense 7,432 15,027 6,862
(Increase) decrease in operating
assets and liabilities:
Accounts receivable (488,850) (375,397) (135,907)
Inventories (6,911,712) (1,961,526) (1,675,226)
Prepaid expenses and other
current assets 245,890 (329,500) (126,494)
Other assets 178,333 (150,000) (42,500)
Accounts payable 702,603 696,535 1,508,542
Income taxes payable 251,693 170,752 -
Accrued expenses and other
current liabilities 167,338 (296,059) (435,713)
------------ ---------- ----------
Net cash provided by operating activities 1,105,595 970,301 476,024
------------ ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (741,740) (744,596) (555,645)
Purchases of intangible asset - (365,000) -
Net proceeds from the sale of property
and equipment - 15,000 2,016,921
------------ ---------- ----------
Net cash (used in) provided by investing
activities (741,740) (1,094,596) 1,461,276
------------ ---------- ----------
Cash flows from financing activities:
Proceeds from the exercise of stock
options and warrants 1,999,345 580,836 -
Payments on the line of credit - (141,214) -
(Payments) borrowings on loan obligation (68,443) (68,442) 205,327
Payments on capital lease obligation - - (247,209)
Payments on mortgage payable - - (1,566,833)
------------ ---------- ----------
Net cash provided by (used in) financing
activities 1,930,902 371,180 (1,608,715)
------------ ---------- ----------
Net increase in cash and cash equivalents 2,294,757 246,885 328,585
Cash and cash equivalents, at beginning
of year 984,169 737,284 408,699
------------ ---------- ----------
Cash and cash equivalents, at end of year $ 3,278,926 $ 984,169 $ 737,284
============ ========== ==========
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 14,302 $ 30,675 $ 29,150
============ ========== ==========
Cash paid for income taxes $ 2,513,214 $ 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, online and direct mail advertising campaigns,
which aim to increase the recognition of the "1-800-PetMeds"
brand name, increase traffic on its website at
www.1800PetMeds.com , acquire new customers, and maximize
repeat purchases. The majority of all of the Company's sales
are to residents in the United States. The Company's
executive offices are located in Pompano Beach, Florida.
The Company's fiscal year end is March 31. References
herein to fiscal 2004, 2003, or 2002 refer to the Company's
fiscal years ended March 31, 2004, 2003 and 2002,
respectively.
Principles of Consolidation
The consolidated financial statements include the accounts
of the Company and its two wholly owned subsidiaries. All
significant intercompany transactions have been eliminated
in consolidation.
Revenue Recognition
The Company generates revenue by selling pet medication
products primarily to retail consumers and minimally to
wholesale customers. The Company's policy is to recognize
revenue from product sales upon shipment, when the rights of
ownership and risk of loss have passed to the consumer.
Outbound shipping and handling fees are included in sales
and are billed upon shipment. Shipping and handling
expenses are included in cost of sales.
The majority of the Company's sales are paid by credit cards
and the Company usually receives the cash settlement in one
to three banking days. Credit card sales minimize the
accounts receivable balances relative to sales. The Company
maintains an allowance for doubtful accounts for losses that
the Company estimates will arise from customers' inability
to make required payments, arising from either credit card
charge-backs or insufficient fund checks. The Company
determines its estimates of the uncollectibility of accounts
receivable by analyzing historical bad debts and current
economic trends. At March 31, 2004 and 2003 the allowance
for doubtful accounts was approximately $23,000 and $17,000,
respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with
maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents at March 31, 2004
and 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, 2004 and 2003 the
inventory reserve was approximately $228,000 and $87,000,
respectively.
Property and Equipment
Property and equipment are stated at cost and depreciated
using the straight-line method over the estimated useful
lives of the assets. The furniture, fixtures, equipment and
computer software are depreciated over periods ranging from
three to seven years. Leasehold improvements and assets
under capital lease agreements are amortized over the
shorter of the underlying lease agreement or the useful life
of the asset.
Long-lived Assets
Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the
carrying amount may not be recoverable. Recoverability of
assets is measured by a comparison of the carrying amount of
the asset to net future cash flows expected to be generated
from the asset.
Intangible Asset
The intangible asset consists of a toll free telephone
number, which the Company obtained in the quarter ended
September 30, 2002. The Company paid $365,000, to reimburse
previously expended advertising costs relating to obtaining
the rights to the toll free number. In accordance with the
Statement of Financial Accounting Standards ("SFAS") No.
142, Goodwill and Other Intangible Assets, the intangible
asset is not being amortized, and is subject to an annual
review for impairment.
Advertising
The Company's advertising expense consists primarily of
television advertising, internet marketing, print
advertising, 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, 2004 2003 2002
- -------------------- ----------- ----------- ------------
Reported net income: $ 5,813,604 $ 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 289,907 285,258 129,465
---------- ---------- ----------
Proforma net income: $ 5,523,697 $ 2,972,307 $ 695,948
========== ========== ==========
Reported basic net income
per share: $ 0.30 $ 0.19 $ 0.05
========== ========== ==========
Proforma basic net income
per share: $ 0.28 $ 0.17 $ 0.04
========== ========== ==========
Reported diluted net income
per share: $ 0.25 $ 0.16 $ 0.04
========== ========== ==========
Proforma diluted net income
per share: $ 0.23 $ 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 2004, 2003, and 2002 was $4.13,
$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: no dividend yield; risk-free interest rates
ranging from 4 to 6 percent; expected lives of 3-5 years,
and expected volatility of 68 percent, 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,
2004 2003
----------- -----------
Leasehold improvements 379,259 289,901
Computer software 390,787 327,197
Furniture, fixtures and equipment 2,195,277 1,606,484
Equipment and software under capital lease 113,398 113,398
----------- -----------
3,078,721 2,336,980
Less: accumulated depreciation and amortization (1,390,394) (840,001)
----------- -----------
Property and equipment, net $ 1,688,327 $ 1,496,979
=========== ===========
Amortization expense for equipment and software under
capital leases was approximately $35,000, $24,000, and
$93,000, as of March 31, 2004, 2003, and 2002, respectively.
F-9
(3) Accrued Expenses
Major classifications of accrued expenses consist of the
following:
March 31,
2004 2003
-------- --------
Accrued salaries 290,722 237,165
Accrued legal expenses 88,000 78,000
Other accrued liabilities 343,628 239,847
-------- --------
Accrued expenses $ 722,350 $ 555,012
======== ========
(4) Line of Credit Agreement and Loan Obligations
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 25,
2003 the Company signed an amendment to its current lease
agreement to obtain an additional 8,000 square feet, with an
option to add another 3,600 square feet, to its current
32,000 square foot facility, which became available on
October 1, 2003.
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. On August 28, 2003, the Company signed an
amendment to their existing line of credit agreement, which
extended the line of credit from $2,000,000 up to
$5,000,000. The Company's $5,000,000 line of credit is
effective through August 28, 2004, and the interest rate is
at the published thirty day London Interbank Offered Rates
("LIBOR") plus 2.40% (3.50% and 3.92% at March 31, 2004 and
2003, respectively), and contains various financial and
operating covenants. At March 31, 2004 and 2003, there was
no balance outstanding under the line of credit agreement.
On March 12, 2002, the Company entered into a $205,000,
three year term loan agreement with a bank, with interest
accruing at the lending institution's base rate plus 1%
(5.00% and 5.25% at March 31, 2004 and 2003, respectively).
The loan proceeds were used to purchase a $250,000 computer
server. The aggregate loan maturities are approximately
$68,000 per year for three years.
The line of credit and the term loan are secured by
substantially all of the Company's assets.
(5) Shareholders' Equity
On November 22, 2000, Tricon Holdings, LLC, a Florida
limited liability corporation ("Tricon") a related party
(see Note 8), acquired 10,000,000 shares of the Company's
authorized and unissued shares of common stock and warrants
to purchase 3,000,000 shares of the Company's authorized and
unissued shares of common stock. The warrants are
exercisable at $.33 per share and expire on November 22,
2005. Tricon acquired the Company's shares and warrants in
exchange for $2,000,000, which was paid in fiscal year 2001.
On May 31, 2001, the Company's Board of Directors adopted an
amendment to the Corporation's Articles of Incorporation to
provide for the increase in the authorized amount of shares
of common stock from 20,000,000 to 40,000,000 and adopt an
amendment to the Company's 1998 Stock Option Plan (the
"Plan") to increase the number of shares of common stock
issuable under the Plan from 3,000,000 to 5,000,000 shares.
F-10
(5) Shareholders' Equity (Continued)
Preferred Stock
In April 1998, the Company issued 250,000 shares of its
$.001 par value preferred stock at a price of $4.00 per
share, less issuance costs of $112,187. Each share of the
preferred stock is convertible into approximately 4.05
shares of common stock at the election of the shareholder.
The preferred stock was recorded at $887,813, net of the
value of the beneficial conversion feature of $771,525. The
value of the beneficial conversion feature was computed as
the difference between the closing market price of the
Company's common stock ($1.75 per share) and the conversion
price of the preferred stock ($.988 per share) on the date
the preferred stock was sold. This amount was immediately
recognized as a reduction to net income available to common
stockholders. The shares have a liquidation value of $4.00
per share and may pay dividends at the sole discretion of
the Company. The Company does not anticipate paying
dividends to the preferred shareholders in the foreseeable
future. Each share of preferred stock is entitled to one
vote on all matters submitted to a vote of shareholders of
the Company. As of March 31, 2004 and 2003, 2,500 shares of
the convertible preferred stock remained unconverted and
outstanding.
(6) Income Taxes
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The tax effects of
temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are as
follows:
March 31,
2004 2003
--------- ---------
Deferred tax assets:
Bad debt and inventory reserves 94,507 39,041
Deferred compensation (stock options) - 59,814
Accrued expenses 141,246 58,033
Net operating loss carryforward 1,339,699 1,439,932
--------- ---------
Deferred tax assets 1,575,452 1,596,820
Less: valuation allowance (803,902) (938,766)
--------- ---------
Total deferred tax assets 771,550 658,054
Deferred tax liabilities:
Depreciation (190,194) (76,698)
--------- ---------
Total net deferred taxes $ 581,356 $ 581,356
========= =========
The change in the valuation allowance for the year ended
March 31, 2004 and 2003 is approximately $135,000 and
$1,266,000, respectively. At March 31, 2004, the Company
had net operating loss carryforwards of approximately
$3,560,000. The net operating loss carryforwards expire in
the years 2013 through 2020. The use of such net operating
loss carryforwards is limited to approximately $266,000
annually; due to the November 22, 2000 change of control.
The components of the income tax provision consist of the
following:
March 31,
2004 2003
--------- ---------
Current taxes
Federal $ 2,902,988 $ 686,655
State 496,933 117,542
--------- ---------
Total current taxes $ 3,399,921 $ 804,197
--------- ---------
Deferred taxes
Federal $ - $ (496,385)
State - (84,971)
--------- ---------
Total deferred taxes $ - $ (581,356)
--------- ---------
Total provision for income taxes $ 3,399,921 $ 222,841
========= =========
F-11
(6) Income Taxes (Continued)
The reconciliation of income tax provision computed at the
U.S. federal statutory tax rates to income tax expense is as
follows:
Year Ended March 31,
2004 2003 2002
--------- --------- ---------
Income taxes at U.S. statutory rates $ 3,132,599 $ 1,183,338 $ 280,640
State income taxes, net of federal
tax benefit 334,451 126,339 29,962
Permanent differences 992 1,512 877
Other 66,743 177,763 -
Change in valuation allowance (134,864) (1,266,111) -
Utilization of net operating losses - - (311,479)
--------- --------- ---------
Total provision for income taxes $ 3,399,921 $ 222,841 $ -
========= ========= =========
(7) Stock Options and Warrants
Stock Options Granted to Employees
The Company established the 1998 Stock Option Plan (the
"Plan") effective July 31, 1998, which provides for the
issuance of qualified options to officers and key employees,
and nonqualified options to directors, consultants and other
service providers. The Company has reserved 5,000,000
shares of common stock for issuance under the Plan. The
exercise prices of options issued under the Plan must be
equal to or greater than the market price of the Company's
common stock as of the date of issuance. The Company had
2,019,337 and 2,743,600 options outstanding under the Plan
at March 31, 2004 and 2003, respectively. Options issued
prior to July 31, 1998 are not included in the Plan.
A summary of the status of stock options and certain
warrants issued by the Company, together with changes during
the periods indicated, is presented in the following table:
Weighted-
average
Options exercise price
------------ --------------
Balance at March 31, 2001 4,544,700 $ 1.24
Options Granted 387,500 1.26
Options Canceled (695,100) 2.81
----------- ---------
Balance at March 31, 2002 4,237,100 0.98
Options Granted 910,432 0.75
Options and Warrants Exercised (1,800,868) 0.36
Options Canceled (603,064) 1.45
----------- ---------
Balance at March 31, 2003 2,743,600 1.06
Options Granted 455,500 7.94
Options Exercised (1,179,596) 1.09
Options Canceled (167) 4.50
----------- ---------
Balance at March 31, 2004 2,019,337 $ 2.60
=========== =========
F-12
(7) Stock Options and Warrants (Continued)
The following table summarizes information for options
currently outstanding and exercisable at March 31, 2004:
March 31, 2004 Options Outstanding Options Exercisable
- -------------- ------------------------------------ ----------------------
Weighted- Weighted- Weighted-
average average average
Exercise Remaining Exercise Exercise
Price Range Number Life Price Numbr Price
- --------------- ------------------------------------ ----------------------
$ 0.32 - $ 0.86 479,170 4.18 years $0.42 434,167 $0.37
1.05 - 1.76 993,334 4.22 years 1.25 758,334 1.25
1.90 - 10.64 546,833 4.04 years 6.97 31,333 2.47
- --------------- ------------------------------------ ----------------------
$ 0.20 - $10.64 2,019,337 4.11 years $2.60 1,223,834 $0.97
=============== ==================================== ======================
At March 31, 2004 and 2003, the number of options
exercisable was 1,223,834 and 2,076,964, respectively, and
the weighted-average exercise price of those options was
$0.97 and $1.09, respectively. Adjustments are made for
options forfeited prior to vesting.
Warrants
On November 22, 2000, Tricon Holdings, LLC, a Florida
limited liability corporation ("Tricon"), acquired
10,000,000 shares of the Company's authorized and unissued
shares of common stock and warrants to purchase 3,000,000
shares of the Company's authorized and unissued shares of
common stock. The warrants are exercisable at $.33 per
share and expire on November 22, 2005, and were assigned a
value of $601,260 using the Black Scholes option-pricing
model, as prescribed by SFAS No. 123, with the following
weighted-average assumptions: dividend yield 0.0 percent;
risk-free interest rates of 6.00 percent; expected lives of
3-5 years, and expected volatility of 91 percent. In
September 2002, Tricon exercised 300,000 warrants at the
exercise price of $.33 per share, and the Company received
proceeds of $99,000. In March 2004, Tricon exercised
2,160,000 warrants at the exercise price of $.33 per share,
and the Company received proceeds of $712,800. At March 31,
2004 all but 540,000 of the 3,000,000 warrants issued on
November 22, 2000 were exercised.
In July 2003, J.W. Genesis exercised 59,583 warrants via a
cashless exercise, forfeiting 15,417 shares. The Company
did not receive proceeds upon exercise of these warrants.
(8) Related Party Transactions
Guven Kivilcim, a former member of Tricon Holdings, LLC and
a former member of the Company's Board of Directors, has an
interest in Intelligent Switching & Software LLC, and Numind
Software Systems, Inc., which the Company conducted business
with during the fiscal year ended March 31, 2003.
Intelligent Switching & Software LLC provided the Company
with long distance telecommunication services, and Numind
Software Systems, Inc. provided the Company with Internet
and website design and hosting services. The Company paid
$0 and $154,000 to Intelligent Switching & Software LLC, and
$0 and $45,000 to Numind Software Systems, Inc., for
services during the fiscal years ended March 31, 2004 and
2003, respectively. The Company owed $0 and $5,000 to
Intelligent Switching & Software LLC, and $0 and $14,000 to
Numind Software Systems, Inc., which were included in the
Company's accounts payable balance as of March 31, 2003.
F-13
(9) Net Income Per Share
In accordance with the provisions of SFAS No. 128, "Earnings
Per Share," basic net income per share is computed by
dividing net income available to common shareholders by the
weighted average number of common shares outstanding during
the period. Diluted net income per share includes the
dilutive effect of potential stock option 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:
Year Ended March 31,
2004 2003 2002
----------- ----------- -----------
Net income (numerator):
Net income $ 5,813,604 $ 3,257,565 $ 825,413
=========== =========== ===========
Shares (denominator)
Weighted average number of common shares
outstanding used in basic computation 19,471,681 17,300,130 16,360,010
Common shares issuable upon exercise
of stock options and warrants 4,208,060 3,439,260 3,369,358
Common shares issuable upon conversion
of preferred shares 10,125 10,125 10,125
----------- ----------- -----------
Shares used in diluted computation 23,689,866 20,749,515 19,739,493
=========== =========== ===========
Net income per common share:
Basic $ 0.30 $ 0.19 $ 0.05
=========== =========== ===========
Diluted $ 0.25 $ 0.16 $ 0.04
=========== =========== ===========
At March 31, 2004, 2003 and 2002, 305,000, 124,600 and
2,124,600 shares, respectively, of common stock options and
warrants, with a weighted average exercise price of $10.16,
$2.43 and $1.53, respectively, were excluded from the
diluted net income per share computation as their exercise
prices were greater than the average market price of the
common shares for the period.
(10) Valuation and Qualifying Accounts
Activity in the Company's valuation and qualifying accounts
consists of the following:
Year Ended March 31,
2004 2003 2002
----------- ----------- -----------
Allowance for doubtful accounts:
Balance at beginning of period $ 16,644 $ 7,475 $ 9,740
Provision for doubtful accounts 7,702 14,759 (319)
Write-off of uncollectible accounts
receivable (1,359) (5,590) (1,946)
----------- ----------- -----------
Balance at end of period $ 22,987 $ 16,644 $ 7,475
=========== =========== ===========
Valuation allowance for deferred tax assets:
Balance at beginning of period $ 938,766 $ 2,204,877 $ 2,554,081
(Deletions) / additions (134,864) (1,266,111) (349,204)
----------- ----------- -----------
Balance at end of period $ 803,902 $ 938,766 $ 2,204,877
=========== =========== ===========
F-14
(11) Commitments and Contingencies
Legal Matters
Various complaints had been filed with the Florida Board of
Pharmacy between November 2000 and March 2002. These
complaints, the majority of which were filed by
veterinarians who are in competition with the Company for
the sale of pet prescription-required products, alleged
violations of the Pharmacy Practice Act and regulations
promulgated there under. The vast majority of the
complaints alleged that the Company, through its
pharmacists, improperly dispensed prescription-required
veterinary medication based on prescriptions verified
through the Company's discontinued alternate veterinarian
program. The alternate veterinarian program used a
veterinarian outside the State of Florida to verify certain
prescriptions for pets outside the State of Florida. While
the program was not used for pets residing in the State of
Florida, the complaints had, for the most part, been filed
with the Florida Board of Pharmacy. Other complaints
alleged the dispensing of medication without a valid
prescription, the sale of non-conforming products and that
the Company's pharmacy was operating at the same location as
another pharmacy, with which it had a contractual
relationship. The Company contested all allegations and
continued discussions in an attempt to reach a resolution of
these matters.
In February 2002, the Company voluntarily ceased the use of
its alternate veterinarian program, and in March 2002 a
business decision was made to enter into a settlement
agreement with the Florida Board of Pharmacy, rather than to
proceed with costly and lengthy litigation. In April 2002,
the Florida Board of Pharmacy approved the settlement
agreement. The Florida Board of Pharmacy did not reach any
finding of fact or conclusion of law that the Company
committed any wrongdoing or violated any rules or laws
governing the practice of pharmacy. According to the
settlement agreement, the Company's pharmacy license was
placed on probation for a period of three years and the
Company, the Company's pharmacists and contracted pharmacy
and pharmacist, paid approximately $120,000 in fines and
investigative costs in July 2002. Based on its demonstrated
compliance with pharmacy rules and laws, effective March 11,
2004, PetMed Express was released from probation over one
year early by the Florida Board of Pharmacy. The Company
remains licensed with the State of Florida and continues to
operate its principal business in Florida.
The Company has settled with various other states' pharmacy
boards in the past. There can be no assurances made that
other states will not attempt to take similar actions
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 which was paid
in September 2003, a reduction from the previously assessed
fine of $445,000. For the purpose of this CAFO, the Company
admitted to the jurisdictional allegations set forth, and
neither admitted nor denied the alleged violations. On
September 28, 2001, the CAFO was approved and ordered by the
regional judicial officer. Accordingly, a gain of $345,000
was reflected in the statement of income for the year ended
March 31, 2002, to reflect the adjustment to this
settlement.
F-15
(11) Commitments and Contingencies (Continued)
On March 19, 2002, Novartis Animal Health U.S., Inc.
("Novartis") filed a complaint against the Company and two
other defendants in U.S. District Court for the Southern
District of Florida. Novartis purported to assert seven
claims related to the Company's alleged sale of pet
medications produced for a Novartis Australian sister
company: Count I: Infringement of Registered Trademark Under
Section 32 of the Lanham Act, 15 U.S.C. 1114; Count II:
Infringement of Unregistered Trademarks Under Section 43(a)
of the Lanham Act, 15 U.S.C. 1125(a); Count III: False
Advertising Under Section 43(a) of the Lanham Act, 15 U.S.C.
1125(a); Count IV: Misleading Advertising Under Florida
Statutory Law; Count V: Deceptive and Unfair Trade Practices
Under Florida Statutory Law; Count VI: Injury to Business
Reputation Under Florida Statutory Law; Count VII: Common
Law Unfair Competition. Subsequent to the year ended March
31, 2003, the Company reached a final settlement agreement
with Novartis. According to the confidential settlement
agreement dated April 7, 2003, the Company had
satisfactorily resolved the contested issues raised by the
complaint and the confidential settlement terms had no
material impact on the Company's operations and financial
results.
The Company is a defendant in a lawsuit, filed in August
2002, in Texas state district court seeking injunctive and
monetary relief styled Texas State Board of Pharmacy and
State Board of Veterinary Medical Examiners v. PetMed
Express, Inc. Cause No.GN-202514, in the 201st Judicial
District Court, Travis County, Texas. The Company in its
initial pleading denied the allegations contained therein.
The Company will vigorously defend, is confident of its
compliance with the applicable law, and finds wrong-on-the-
facts the vast majority of the allegations contained in the
Plaintiffs' supporting documentation attached to the
lawsuit. Discovery has commenced and at this stage of the
litigation it is difficult to assess any possible outcome or
estimate any potential loss in the event of an adverse
outcome.
On May 1, 2001, the former Chief Financial Officer ("CFO")
of the Company, provided notice of termination of his
Executive Employment Agreement with the Company dated March
7, 2000, as amended. In the notice, the former CFO also
demanded payment of certain benefits allegedly due under the
Executive Employment Agreement. The Company continued
discussions in an effort to resolve this matter, and in
accordance with the CFO's Executive Employment Agreement,
the Company accrued a severance charge for the amount of
$120,000 in fiscal 2002. On October 31, 2001, the Company
entered into a Release and Termination agreement with its
former CFO. The former CFO's termination date was effective
as of May 31, 2001. The agreement entitled the former CFO
to receive an amount of $120,000, which was paid in fiscal
2002. The former CFO had a right to exercise any stock
options granted to him by the Company, for a period of 30
days from the termination date. Additionally, the former
CFO agreed to provide consulting services to the Company on
financial matters until March 31, 2002, for which he was
separately compensated.
On June 13, 2001, the Company entered into a Release and
Termination agreement with its former Chief Operating
Officer ("COO"). The former COO's termination date was
effective as of May 18, 2001. The agreement entitled the
former COO to receive an amount of $75,000, which was paid
in fiscal 2002. The former COO had a right to exercise any
stock options granted to him by the Company, for a period of
30 days from the termination date. Additionally, the former
COO agreed to provide consulting services to the Company on
regulatory and legal matters until December 31, 2001, for
which he was separately compensated.
The Company is a party to routine litigation and
administrative complaints incidental to its business. The
Company's management does not believe that the resolution of
any or all of such routine litigation and administrative
complaints are likely to have a material adverse effect on
the Company's financial condition or results of operations.
Employment Agreement
On March 16, 2001, the Company entered into an employment
agreement with its Chief Executive Officer ("CEO"), Menderes
Akdag ("Mr. Akdag"). Under the terms of this three-year
agreement the Company paid the CEO an annual salary of
$150,000 for the first six months of the agreement, and
thereafter his annual salary was increased to $200,000. The
Company also granted the CEO options to purchase 750,000
shares of its common stock under the Company's 1998 Stock
Option Plan at an exercise price of $.32 per share, which
vested at the rate of 187,500 options on each of March 16,
2001, 2002, 2003 and 2004.
F-16
(11) Commitments and Contingencies (Continued)
On March 16, 2004, the Company amended the CEO's existing
employment agreement. The amendments are as follows: the
term of the agreement will be for three years, commencing on
March 16, 2004; Mr. Akdag's salary will be increased to
$250,000 per year throughout the term of the agreement, and
Mr. Akdag shall be granted 250,000 incentive stock options
under the Company's 1998 Stock Option Plan at an exercise
price of $10.64 per share, which vest at the rate of 83,333
options on each of March 16, 2005 and 2006, and 83,334
options on March 16, 2007.
Operating Lease
The Company leases their 40,000 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, 2004, are as
follows:
Years Ending March 31,
----------------------
2005 383,000
2006 398,000
2007 67,000
---------
Total lease payments $ 848,000
=========
Rent expense was $330,000, $253,000 and $149,000 for the
years ended March 31, 2004, 2003 and 2002, respectively.
(12) Sales by Category
The following table provides a breakdown of the percentage
of our total sales by each category during the indicated
periods:
Year Ended March 31,
2004 2003 2002
---- ---- ----
Prescription medications 30% 29% 34%
Non-prescription medications 69% 64% 58%
Shipping and handling charges and other 1% 7% 8%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
(13) Quarterly Financial Data (unaudited)
Summarized unaudited quarterly financial data for fiscal
2004 and 2003 is as follows:
Quarter Ended: June 30, 2003 September 30, 2003 December 31, 2003 March 31, 2004
- ------------- ------------- ------------------ ----------------- --------------
Sales $ 30,387,563 $ 24,969,228 $ 17,169,571 $ 21,467,871
Income from operations $ 2,147,288 $ 2,929,004 $ 1,976,108 $ 2,158,994
Net income $ 1,432,584 $ 1,818,188 $ 1,223,924 $ 1,338,908
Diluted net income per share $ 0.06 $ 0.08 $ 0.05 $ 0.06
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
(a) The Company recorded a deferred tax asset of
approximately $581,000, during the quarter ended March 31,
2003, resulting in an increase of diluted net income of $.03
per share.
F-17
_________________________________________________________________
_________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
PETMED EXPRESS, INC
_______________________
Form 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED:
MARCH 31, 2004
_______________________
EXHIBITS
_______________________
_________________________________________________________________
_________________________________________________________________
EXHIBIT INDEX
Exhibit Number of Pages Incorporated
Number Description in Original Document* By Reference
- ------- ----------- -------------------- ------------
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 1 **
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 1 **
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 1 **
21.1 Subsidiaries of the Company 1 **
** Filed herewith