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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2006
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
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PETMED EXPRESS, INC.
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(Exact name of Registrant as specified in its charter)
FLORIDA 65-0680967
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1441 S.W. 29th Avenue, Pompano Beach, Florida 33069
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 979-5995
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Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
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Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of "accelerated filer" or "large
accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value of the common stock held by non-
affiliates of the registrant as of September 30, 2005, the last
business day of the registrant's most recently completed second
fiscal quarter, was $194,674,000 based on the closing sales price
for the Registrant's Common Stock on that date.
The number of shares of the Registrant's Common Stock outstanding
as of May 31, 2006 was 24,007,390.
DOCUMENTS INCORPORATED BY REFERENCE
Information to be set forth in our Proxy Statement relating to
our 2006 Annual Meeting of Stockholders to be held on July 28,
2006 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.
2006 Annual Report on Form 10-K
TABLE OF CONTENTS
Page
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PART I......................................................... 1
Item 1. Business............................................ 1
Item 1A. Risk Factors........................................ 5
Item 1B. Unresolved Staff Comments........................... 9
Item 2. Properties.......................................... 9
Item 3. Legal Proceedings................................... 10
Item 4. Submission of Matters to a Vote of Security Holders. 10
PART II........................................................ 11
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities................................... 11
Item 6. Selected Financial Data............................. 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 13
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk......................................... 20
Item 8. Financial Statements and Supplementary Data......... 21
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.............. 40
Item 9A. Controls and Procedures............................. 40
Item 9B. Other Information................................... 40
PART III....................................................... 41
Item 10. Directors and Executive Officers of the
Registrant......................................... 41
Item 11. Executive Compensation............................. 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters..... 41
Item 13. Certain Relationships and Related Transactions..... 41
Item 14. Principal Accounting Fees and Services............. 41
PART IV........................................................ 42
Item 15. Exhibits, Financial Statement Schedules............ 42
SIGNATURES..................................................... 44
PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain information in this Annual Report on Form 10-K
includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. You can identify these forward-
looking statements by the words "believes," "intends," "expects,"
"may," "will," "should," "plan," "projects," "contemplates,"
"intends," "budgets," "predicts," "estimates," "anticipates," or
similar expressions. These statements are based on our beliefs,
as well as assumptions we have used based upon information
currently available to us. Because these statements reflect our
current views concerning future events, these statements involve
risks, uncertainties and assumptions. Actual future results may
differ significantly from the results discussed in the forward-
looking statements. A reader, whether investing in our common
stock or not, should not place undue reliance on these forward-
looking statements, which apply only as of the date of this
Annual Report.
When used in this Annual Report on Form 10-K, "PetMed
Express," "1-800-PetMeds," "PetMed," "PetMed Express.com," "the
Company," "we," "our," and "us" refer to PetMed Express, Inc.
and our subsidiaries.
ITEM 1. BUSINESS
General
PetMed Express, Inc. and subsidiaries, d/b/a 1-800-PetMeds, is
a leading nationwide pet pharmacy. The Company markets
prescription and non-prescription pet medications, and other
health products for dogs, cats, and horses direct to the
consumer. The Company offers consumers an attractive alternative
for obtaining pet medications in terms of convenience, price, and
speed of delivery.
The Company markets its products through national television,
online and direct mail/print advertising campaigns, which aim to
increase the recognition of the "1-800-PetMeds" brand name,
increase traffic on its website at www.1800petmeds.com, acquire
new customers, and maximize repeat purchases. Our fiscal year
end is March 31, our executive offices are located at 1441 S.W.
29th Avenue, Pompano Beach, Florida 33069, and our telephone
number is (954) 979-5995. The information contained on the
Company's website is not part of our Annual Report.
Our Products
We offer a broad selection of products for dogs, cats and
horses. These products include a majority of the well-known
brands of medication, such as Frontline Plus(r), K9 Advantix(r),
Advantage(r), Heartgard Plus(r), Sentinel(r), Interceptor(r), Program(r),
Revolution(r), Deramaxx(r) and Rimadyl(r). Generally, our prices are
competitive with the prices for medications charged by
veterinarians and retailers.
We research new products, and regularly select new products or
the latest generation of existing products to become part of our
product selection. In addition, we also refine our current
products to respond to changing consumer-purchasing habits. Our
website is designed to give us the flexibility to change featured
products or promotions. Our product line provides customers with
a wide variety of selections across the most popular health
categories for dogs, cats and horses. Our current products
include:
Non-Prescription Medications (OTC): Flea and tick control
products, bone and joint care products, vitamins and
nutritional supplements, and hygiene products.
Prescription Medications (Rx): Heartworm treatments, thyroid
and arthritis medications, antibiotics, and other specialty
medications, as well as generic substitutes.
1
Sales
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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,
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2006 2005 2004
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Non-prescription medications 70% 69% 69%
Prescription medications 29% 30% 30%
Shipping and handling charges and other 1% 1% 1%
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Total 100% 100% 100%
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We offer our products through three main sales channels:
Internet, through our website, telephone contact center, through
our toll-free number, and direct mail/print, through the 1-800-
PetMeds catalog and postcards. We have designed both our catalog
and website to provide a convenient, cost-effective and
informative shopping experience that encourages consumers to
purchase products important for a pet's health and quality of
life. We believe that these multiple channels allow us to
increase the visibility of our brand name and provide customers
with increased shopping flexibility and service.
Internet
We seek to combine our product selection and pet health
information with the shopping ease of the Internet to deliver a
convenient and personalized shopping experience. Our website
offers health and nutritional product selections for dogs, cats
and horses, and relevant editorial and easily obtainable or
retrievable resource information. From our home page, customers
can search our website for products and access resources on a
variety of information on dogs, cats and horses. Customers can
shop at our website by category, product line or individual
product. We attracted approximately 10.7 million visitors to our
website during the fiscal 2006, approximately 11% of those
visitors placed an order, and our website generated approximately
57% of our total sales for the same time period.
In February 2006 the Company introduced a new website, called,
"Pet Health 101" which is located at www.PetHealth101.com. In Pet
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Health 101, you have access to health information covering pet's
behavior and illnesses - and to the natural and pharmaceutical
remedies specifically for your pet's problems. Pet Health 101 is
updated with the latest research for pet owners.
Telephone Contact Center
We currently employ 113 customer care representatives in our
contact center. Our customer care representatives receive and
process inbound customer calls, facilitate our outbound campaigns
around maximizing customers' reorders, facilitate our live web
chat and process customer e-mails. Our telephone system is
equipped with certain features including pop-up screens and call
blending capabilities that give us the ability to efficiently
utilize our customer care representatives' time, providing
quality customer care and service and support. Our customer care
representatives receive a base salary and are rewarded with
commissions for sales.
Direct Mail/Print
The 1-800-PetMeds catalog is a full-color catalog that
features our most popular products. The catalog is produced by a
combination of in-house writers, production artists and
independent contractors. We mail catalogs and postcards in
response to requests generated from our advertising and as part
of direct mail campaigns.
Our Customers
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Approximately 1,600,000 customers have purchased from us
within the last two years. We attracted approximately 624,000
and 510,000 new customers in fiscal 2006 and 2005, respectively.
Our customers are located throughout the United States, with
approximately 51% of customers residing in California, Florida,
New York, Texas, Pennsylvania, New Jersey, and Georgia. The
average retail purchase was approximately $77.
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 retailers in the United States. For the fiscal year
ended March 31, 2006, the majority of our sales were made to
retail customers with approximately 3% of our sales made to
wholesale customers.
2
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
mail/print and e-mail, and online marketing.
Television Advertising
Our television advertising is designed to build brand equity,
create awareness, and generate initial purchases of products via
the telephone and the Internet. We have used :30 and :15 second
television commercials to attract new customer orders, with the
tagline "the 1-800-PetMeds difference, great savings, fast
service, free shipping." Our television commercials typically
focus on our ability to rapidly deliver to customers the same
medications offered by veterinarians, but at reduced prices. We
generally purchase advertising on national cable channels to
target our key demographic groups. We believe that television
advertising is particularly effective and instrumental in
building brand awareness.
Direct Mail/Print and E-mail
We use direct mail/print and e-mail to acquire new customers
and to remind our existing customers to reorder.
Online Marketing
We supplement our traditional advertising with online
advertising and marketing efforts. We are members of the
LinkShare Network, which is an affiliate program with merchant
clients and affiliate websites. This network is designed to
develop and build a long-term, branded affiliate program in order
to increase online sales and establish an Internet presence. The
LinkShare Network enables us to establish link arrangements with
other websites, as well as with portals and search engines. We
also make our brand available to internet consumers by purchasing
targeted keywords and achieving prominent placement on the top
search engines and search engine networks, including Google,
Microsoft Network, and Yahoo.
Operations
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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. Having
strong relationships with product manufacturers will ensure the
availability of adequate volume of products ordered by our
customers, and will enable us to provide more and better product
information. Historically, substantially all the major
manufacturers of prescription and non-prescription medications
have declined to sell these products to direct marketing
companies. (See Risk Factors.) Part of our growth strategy
includes developing direct relationships with the leading
pharmaceutical manufacturers of the more popular prescription and
non-prescription medications.
Order Processing
The Company provides its customers with toll-free telephone
access to its customer care representatives. Our call center
generally operates from 8:00 AM to 11:00 PM Monday through
Thursday, 8:00 AM to 9:00 PM on Friday, 9:00 AM to 6:00 PM on
Saturday, and 10:00 AM to 5:00 PM on Sunday, Eastern Standard
Time. The process of customers purchasing products from 1-800-
PetMeds consists of a few simple steps. A customer first places
a call to our toll-free telephone number or visits our website.
The following information is needed to process prescription
orders: general pet information, prescription, and the
veterinarian's name and phone number. This information is
entered into our computer system. Then our pharmacists and
pharmacy technicians verify all prescriptions. The order process
system checks for the verification for prescription medication
orders and a valid payment method for all orders. An invoice is
generated and printed in our fulfillment center, where items are
picked for shipping. The customer's order is then selected from
the Company's inventory and shipped via United States Priority
Mail, United Parcel Service, or Federal Express. Our customers
enjoy the convenience of rapid home delivery, with approximately
71% of all orders being shipped within 24 hours of ordering. Our
website allows customers to easily browse and purchase
substantially all of our products online. Our website is
designed to be fast, secure and easy to use with order and
shipping confirmations, and with online order tracking
capabilities.
3
Warehousing and Shipping
We inventory our products and fill all customer orders from
our 50,000 square foot facility in Pompano Beach, Florida. We
have an in-house fulfillment and distribution operation, which is
used to manage the entire supply chain, beginning with the
placement of the order, continuing through order processing, and
then fulfilling and shipping of the product to the customer. We
offer a variety of shipping options, including next day delivery.
We ship to anywhere in the United States served by the United
States Postal Service, United Parcel Service, and Federal
Express. Priority orders are expedited in our fulfillment
process. Our goal is to ship the products the same day that the
order is received. For prescription medications, our goal is to
ship the product immediately after the prescription has been
authorized by the customer's veterinarian.
Customer Service and Support
We believe that a high level of customer service and support
is critical in retaining and expanding our customer base.
Customer care representatives participate in ongoing training
programs under the supervision of our training managers. These
training sessions include a variety of topics such as product
knowledge, computer usage, customer service tips and the
relationship between PetMed Express and veterinarians. Our
customer care representatives respond to customers' e-mails and
calls that are related to order status, prices and shipping. Our
customer care representatives also respond to customers through
our live web chat. If our customer care representatives are
unable to respond to a customer's inquiry at the time of the
call, we strive to provide an answer within 24 hours. We believe
our customer care representatives are a valuable source of
feedback regarding customer satisfaction. Our customer returns
and credits average approximately 1.5% of total sales.
Technology
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PetMed Express utilizes integrated technologies in call
center, e-commerce, order entry, and inventory
control/fulfillment operations. Our systems are custom
configured by the Company to optimize our computer telephone
integration and mail order processing. The systems are designed
to maintain a large database of specialized information and
process a large volume of orders efficiently and effectively.
Our systems provide our agents with real time product
availability information and updated customer information to
enhance our customer service. We also have an integrated direct
connection for processing credit cards to ensure that a valid
credit card number and authorization have been received at the
same time our customer care representatives are on the phone with
the customers or when customers submit an order on our website.
Our information systems provide our customer care representatives
with records of all prior contact with a customer, including the
customer's address, phone number, e-mail address, fax number,
prescription information, order history, payment history and
notes.
Competition
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The pet medications market is competitive and highly
fragmented. Our competitors consist of veterinarians,
traditional retailers, and other mail-order and online retailers
of pet medications and other health products. The Company
believes that the following are the principal competitive factors
in our market:
* Product selection and availability, including the
availability of prescription and non-prescription medications;
* Brand recognition;
* Reliability and speed of delivery;
* Personalized service and convenience;
* Price; and
* Quality of website content.
We compete with veterinarians in the sale of prescription and
non-prescription pet medications and other health products. Many
pet owners may prefer the convenience of purchasing their pet
medications or other health products at the time of the
veterinarian visit, or may be hesitant to offend their
veterinarian by not purchasing these products from the
veterinarian. In order to effectively compete with
veterinarians, we must continue to educate pet owners about the
service, convenience and savings offered by PetMed Express.
According to the American Pet Products Manufacturers
Association, pet spending in the United States increased 5.5% to
$36.3 billion in 2005. Pet supplies and medications represented
$8.7 billion, or 24% of the total pet spending in the United
States. The pet medication market size is estimated to be
approximately $3 billion, with veterinarians having the majority
of the market share. The dog and cat population is approximately
164 million, with approximately 63% of all households owning a
pet.
4
The Company believes that the following are the main
competitive strengths which differentiate 1-800-PetMeds from the
competition:
* "1-800-PetMeds" brand name;
* Quality customer service and support;
* 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,
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www.petmedexpress.com, and www.petmeds.com. As with phone numbers,
- --------------------- ---------------
we do not have and cannot acquire any property rights in an
nternet address. We do not expect to lose the ability to use the
Internet addresses; however, there can be no assurance in this
regard and the loss of these addresses may have a material adverse
effect on our financial position and results of operations. We are
the exclusive owners of United States Trademark Registrations for
"PetMed Express[R]," "1888PetMeds[R]" and "1-800-PetMeds[R]" and
have a trademark application pending for "PetMeds."
Government Regulation
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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, 2007. We are also licensed and/or regulated
by 48 other state pharmacy boards and other regulatory
authorities including, but not necessarily limited to, the United
States Food and Drug Administration ("FDA") and the United States
Environmental Protection Agency ("EPA"). As a licensed pharmacy
in the State of Florida, we are subject to the Florida Pharmacy
Act and regulations promulgated thereunder. To the extent that
we are unable to maintain our license with the Florida Board of
Pharmacy as a community pharmacy, or if we do not maintain the
licenses granted by other state pharmacy boards, or if we become
subject to actions by the FDA, or other enforcement regulators,
our distribution of prescription medications to pet owners could
cease, which could have a material adverse effect on our
operations.
Employees
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The Company currently has 213 full time employees, including:
121 in sales, customer care and marketing; 28 in fulfillment and
purchasing; 52 in our pharmacy; 3 in information technology; 3 in
administrative positions; and 6 in management. None of the
Company's employees are represented by a labor union, or governed
by any collective bargaining agreements. The Company considers
relations with its employees as satisfactory.
ITEM 1A. RISK FACTORS
You should carefully consider the risks and uncertainties
described below, and all the other information included in this
Annual Report before you decide to invest in our common stock.
Any of the following risks could materially adversely affect our
business, financial condition or operating results and could
result in a loss of your investment.
There can be no assurances that we can sustain profitable
operations in future periods.
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We reported net income of $12,064,000, $8,010,000, and
$5,814,000 for the years ended March 31, 2006, 2005, and 2004,
respectively. Our profitability during fiscal 2006 was due in
part to increases in our reorder, new order and wholesale revenue
and the leveraging of our general and administrative and
advertising expenses. There are no assurances we will continue
to generate revenues at this increased level, or that we will
remain profitable during fiscal 2007 and beyond. If our
operations were to cease being profitable, our liquidity in
future periods would be adversely affected.
5
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, laws and regulations, from time to time we have been
the subject of administrative complaints regarding the
authorization of prescriptions prior to shipment. We cannot
assure you that we will not continue to be the subject of
administrative complaints in the future. We cannot guarantee you
that we will not be subject to reprimand, sanctions, probations,
or fines, or that one or more of our pharmacy licenses may not be
suspended or revoked. See Item 3. Legal Proceedings.
We currently purchase a portion of our prescription and non-
prescription medications from third party distributors and we are
not an authorized distributor of these products. We do not have
any guaranteed supply of these medications at any pre-established
prices.
- -----------------------------------------------------------------
For the fiscal years ended March 31, 2006 and 2005, the
majority of our sales were attributable to sales of prescription
and non-prescription medications. Historically, substantially
all the major pharmaceutical manufacturers have declined to sell
prescription and non-prescription pet medications directly to us.
In order to assure a supply of these products, we purchase
medications from various secondary sources, including a variety
of domestic distributors. Our business strategy includes seeking
to establish direct purchasing arrangements with major pet
pharmaceutical manufacturing companies. If we are not successful
in achieving this goal, we will continue to rely upon secondary
sources.
We cannot guarantee that if we continue to purchase
prescription and non-prescription pet medications from secondary
sources that we will be able to purchase an adequate supply to
meet our customers' demands, or that we will be able to purchase
these products at competitive prices. As these products
represent a significant portion of our sales, our failure to fill
customer orders for these products could adversely impact our
sales. If we are forced to pay higher prices for these products
to ensure an adequate supply, we cannot guarantee that we will be
able to pass along to our customers any increases in the prices
we pay for these medications. This inability to pass along
increased prices could materially adversely affect our financial
condition and results of operations.
Our failure to properly manage our inventory may result in
excessive inventory carrying costs, which could materially
adversely affect our financial condition and results of operations.
- -------------------------------------------------------------------
Our current product line contains approximately 750 SKUs. A
significant portion of our sales is attributable to products
representing approximately 90 SKUs. We need to properly manage
our inventory to provide an adequate supply of these products and
avoid excessive inventory of the products representing the
balance of the SKUs. We generally place orders for products with
our suppliers based upon our internal estimates of the amounts of
inventory we will need to fill future orders. These estimates
may be significantly different from the actual orders we receive.
In the event that subsequent orders fall short of original
estimates, we may be left with excess inventory. Significant
excess inventory could result in price discounts and increased
inventory carrying costs. Similarly, if we fail to have an
adequate supply of some SKUs, we may lose sales opportunities.
We cannot guarantee that we will maintain appropriate inventory
levels. Any failure on our part to maintain appropriate
inventory levels may have a material adverse effect on our
financial condition and results of operations.
Resistance from veterinarians to authorize prescriptions could
cause our sales to decrease and could materially adversely affect
our financial condition and results of operations.
- -----------------------------------------------------------------
Since we began our operations some veterinarians have resisted
providing our customers with a copy of their pet's prescription
or authorizing the prescription to our pharmacy staff, thereby
effectively preventing us from filling such prescriptions under
state law. Sales of prescription medications represented
approximately 29% of our sales for the fiscal year. Although
veterinarians in some states are required by law to provide the
pet owner with this prescription information, if the number of
veterinarians who refuse to authorize prescriptions should
increase, our sales could decrease and our financial condition
and results of operations may be materially adversely affected.
6
Our success depends in part on the willingness of more consumers
to purchase pet medications from us. If we do not succeed in
changing consumer-purchasing patterns, our financial condition
and results of operations may be materially adversely affected.
- ----------------------------------------------------------------
The direct marketing of prescription and non-prescription pet
medications and health and nutritional supplements is relatively
new. Our success will depend upon our ability to engage
consumers who have historically purchased pet medications and
health and nutritional supplements from veterinarians. We may
not be able to convert a large number of these pet owners to our
customers. In order for us to be successful, many of these
consumers must be willing to utilize new ways of buying these
products. We cannot guarantee that we will be successful in
shifting these consumer purchasing patterns away from
veterinarians to us. If we do not attract consumers to purchase
these products from us, our financial condition and results of
operations may be materially adversely affected.
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, 2006 were made to customers located in the states of
California, Florida, New York, Texas, Pennsylvania, New Jersey,
and Georgia. If for any reason our license to operate a pharmacy
in one or more of those states should be suspended or revoked, or
if it is not renewed, our financial condition and results of
operations may be materially adversely affected.
We face significant competition from veterinarians and traditional
and online retailers and may not be able to profitably compete
with them.
- ------------------------------------------------------------------
We compete directly and indirectly with veterinarians for the
sale of pet medications and other health products. Veterinarians
hold a competitive advantage over us because many pet owners may
find it more convenient or preferable to purchase these products
directly from their veterinarians at the time of an office visit.
We also compete directly and indirectly with both online and
traditional retailers of pet medications and health and
nutritional supplements. Both online and traditional retailers
may hold a competitive advantage over us because of longer
operating histories, established brand names, greater resources
and an established customer base. Online retailers may have a
competitive advantage over us because of established affiliate
relationships to drive traffic to their website. Traditional
retailers may hold a competitive advantage over us because pet
owners may prefer to purchase these products from a store instead
of online or through catalog or telephone methods. In order to
effectively compete in the future, we may be required to offer
promotions and other incentives, which may result in lower
operating margins or adversely affect the results of operations.
We also face a significant challenge from our competitors
forming alliances with each other, such as those between online
and traditional 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 rights. These afford only limited protection. Despite
our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy our non-prescription private label
generic equivalents, when and if developed, as well as aspects of
our sales formats, or to obtain and use information that we
regard as proprietary, including the technology used to operate
our website, our content and our trademarks.
7
Litigation or proceedings before the United States Patent and
Trademark Office may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets and
domain names, and to determine the validity and scope of the
proprietary rights of others. Any litigation or adverse priority
proceeding could result in substantial costs and diversion of
resources, and could seriously harm our business and operating
results.
Third parties may also claim infringement by us with respect
to past, current or future technologies. We expect that
participants in our markets will be increasingly involved in
infringement claims as the number of services and competitors in
our industry segment grows. Any claim, whether meritorious or
not, could be time consuming, result in costly litigation, cause
service upgrade delays or require us to enter into royalty or
licensing agreements. These royalty or licensing agreements
might not be available on terms acceptable to us or at all.
If we are unable to protect our Internet domain names or to
prevent others from using names that are confusingly similar, our
business may be adversely impacted.
- -----------------------------------------------------------------
Our Internet domain names, www.1800petmeds.com,
-------------------
www.1888petmeds.com, www.petmedexpress.com, and www.petmeds.com
- ------------------- --------------------- ---------------
are critical to our brand recognition and our overall success.
If we are unable to protect these domain names, our competitors
could capitalize on our brand recognition. We are aware of
substantially similar domain names, including www.petmed.com,
--------------
used by competitors. Governmental agencies and their designees
generally regulate the acquisition and maintenance of domain
names. The regulation of domain names in the United States and
in foreign countries has changed, and may undergo further change
in the near future. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks
and similar proprietary rights is unclear. Therefore, we may not
be able to protect our own domain names, or prevent third parties
from acquiring domain names that are confusingly similar to,
infringe upon or otherwise decrease the value of our domain
names.
Since all of our operations are housed in a single location, we
are more susceptible to business interruption in the event of
damage to or disruptions in our facility.
Our headquarters and distribution center are located in the
same building in South Florida, and all of our shipments of
products to our customers are made from this sole distribution
center. We have no present plans to establish any additional
distribution centers or offices. Because we consolidate our
operations in one location, we are more susceptible to power and
equipment failures, and business interruptions in the event of
fires, floods and other natural disasters than if we had
additional locations. Furthermore, because we are located in
South Florida, which is a hurricane-sensitive area, we are
particularly susceptible to the risk of damage to, or total
destruction of, our headquarters and distribution center and
surrounding transportation infrastructure caused by a hurricane.
We cannot assure you that we are adequately insured to cover the
amount of any losses relating to any of these potential events,
business interruptions resulting from damage to or destruction of
our headquarters and distribution center or power and equipment
failures relating to our call center or websites; or
interruptions or disruptions to major transportation
infrastructure or other events that do not occur on our premises.
A portion of our sales are seasonal and our operating results are
difficult to predict and may fluctuate.
- -----------------------------------------------------------------
Because our operating results are difficult to predict, we
believe that quarter-to-quarter comparisons of our operating
results are not a good indication of our future performance. The
majority of our product sales are affected by the seasons, due to
the seasonality of mainly heartworm and flea and tick
medications. Seasonality trends are divided into percentage of
sales by quarter. For the quarters ended June 30, 2005,
September 30, 2005, December 31, 2005, and March 31, 2006 Company
sales were 32%, 28%, 19%, and 21%, 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 or obtaining an
adequate supply of products;
* 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;
8
* The amount and timing of operating costs and capital
expenditures relating to expansion of our product line or
operations; and
* Disruption of our toll-free telephone service, technical
difficulties, systems and Internet outages or slowdowns.
Any change in one or more of these factors could materially
adversely affect our financial condition and results of
operations in future periods.
Our stock price fluctuates from time to time and may fall below
expectations of securities analysts and investors, and could
subject us to litigation, which may result in you suffering a
loss on your investment.
- ---------------------------------------------------------------
The market price of our common stock may fluctuate
significantly in response to a number of factors, some of which
are beyond our control. These factors include: quarterly
variations in operating results; changes in accounting treatments
or principles; announcements by us or our competitors of new
products and services offerings, significant contracts,
acquisitions or strategic relationships; additions or departures
of key personnel; any future sales of our common stock or other
securities; stock market price and volume fluctuations of
publicly-traded companies; and general political, economic and
market conditions.
In some future quarter our operating results may fall below
the expectations of securities analysts and investors, which
could result in a decrease in the trading price of our common
stock. In the past, securities class action litigation has often
been brought against a company following periods of volatility in
the market price of its securities. We may be the targets of
similar litigation in the future. Securities litigation could
result in substantial costs and divert management's attention and
resources, which could seriously harm our business and operating
results.
The interest of our controlling stockholder could conflict with
those of our other stockholders.
- ---------------------------------------------------------------
Tricon Holdings, LLC, ("Tricon") our largest stockholder, owns
and controls 12.1% of our voting securities. This stockholder is
able to influence the outcome of stockholder votes, including
votes concerning: the election of directors; amendments to our
charter and by-laws; and the approval of significant corporate
transactions such as a merger or sale of our assets. This
controlling influence could have the effect of delaying or
preventing a change in control, even if many of our stockholders
believe it is in their best interest.
We may issue additional shares of preferred stock that could
defer a change of control or dilute the interests of our common
stockholders. Our charter documents could defer a takeover
effort which could inhibit your ability to receive an acquisition
premium for your shares.
- -----------------------------------------------------------------
Our charter permits our Board of Directors to issue up to
5,000,000 shares of preferred stock without stockholder approval.
Currently there are 2,500 shares of our Convertible Preferred
Stock issued and outstanding. This leaves 4,997,500 shares of
preferred stock available for issuance at the discretion of our
Board of Directors. These shares, if issued, could contain
dividend, liquidation, conversion, voting or other rights which
could adversely affect the rights of our common stockholders and
which could also be utilized, under some circumstances, as a
method of discouraging, delaying or preventing a change in
control. Provisions of our articles of incorporation, bylaws and
Florida law could make it more difficult for a third party to
acquire us, even if many of our stockholders believe it is in
their best interest.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Our facilities, including our principal executive offices, are
located at 1441 S.W. 29th Avenue, Pompano Beach, Florida 33069.
The Company leases its executive offices and warehouse facility
under a non-cancelable operating lease. The Company is
responsible for certain maintenance costs, taxes and insurance
under this lease. On May 18, 2005 the Company signed an
amendment to extend the current lease agreement through May 31,
2009. The amendment terms are similar to the existing lease
agreement, and the Company exercised its option to lease an
additional 3,600 square feet. On November 28, 2005 the Company
signed a fourth amendment to its current lease agreement. The
Company agreed to lease an additional 7,000 square feet to expand
its warehouse and pharmacy. This addition to the warehouse and
pharmacy was necessary to increase the Company's capacity to
store additional inventory and expand its fulfillment operations.
Under the terms of the new amendments the Company will be leasing
a total 50,000 square feet through May 31, 2009. The future
minimum annual lease payments are as follows: $481,000 for fiscal
2007, $500,000 for fiscal 2008, $520,000 for fiscal 2009, and
$87,000 for fiscal 2010.
9
ITEM 3. LEGAL PROCEEDINGS
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 is vigorously
defending, 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. We are currently negotiating a
settlement of the matter, although there can be no assurances
that the negotiations will be successful. Thus, at this stage it
is difficult to assess the outcome or estimate any potential loss
in the event of an adverse outcome.
On January 19, 2006, PetMed Express, Inc. was added as a
defendant in the matter of Yali Golan v. Marc Puleo (former
President and current Chairman of the Board of Directors of the
Company), filed in the Circuit Court of the Eleventh Judicial
Circuit in and for Miami-Dade County, Florida which had
originally been filed solely against Dr. Puleo in March 2003.
This action is based upon allegations by the plaintiff that Dr.
Puleo individually entered into a written agreement with the
plaintiff (the purported "General Agreement," of which the
plaintiff has not produced an original document) which in
pertinent part granted plaintiff 50% of any salary, stock or
stock options received by Dr. Puleo from the Company for so long
as the Company remains in business. The plaintiff now alleges
that the Company's past and continuing failure to disclose the
purported General Agreement in filings with the SEC has caused
the plaintiff to suffer damages. The plaintiff is seeking a
judgment against the Company for specific performance and
unspecified damages, pre- and post-judgment interest, court fees
and such other relief as the court deems appropriate. The
Company believes that, based on information currently available
to it, the claims being asserted against it are factually and
legally without merit, and the Company intends to vigorously
defend against such claims.
Routine Proceedings
- -------------------
The Company is a party to routine litigation and
administrative complaints incidental to its business. Management
does not believe that the resolution of any or all of such
routine litigation and administrative complaints is likely to
have a material adverse effect on the Company's financial
condition or results of operations. The Company has settled
complaints that had been filed with various states' pharmacy
boards in the past. There can be no assurances made that other
states will not attempt to take similar actions against the
Company in the future. Legal costs related to the above matters
are expensed as incurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our stockholders during
the fourth quarter of the fiscal year ended March 31, 2006.
10
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 2006 and 2005 as
reported by the NASDAQ:
Fiscal 2006: High Low
- ----------- ------ ------
First Quarter $ 8.21 $ 6.50
Second Quarter $11.64 $ 7.63
Third Quarter $15.52 $ 9.83
Fourth Quarter $19.99 $14.34
Fiscal 2005: High Low
- ----------- ------ ------
First Quarter $12.29 $ 6.73
Second Quarter $ 8.10 $ 4.10
Third Quarter $ 7.61 $ 4.63
Fourth Quarter $ 8.55 $ 6.50
There were 61 holders of record of our common stock at May 31,
2006, and we estimate there were approximately 14,400 beneficial
stockholders on that date.
Dividend Policy
The Company has never paid cash dividends on our common stock.
We presently intend to retain future earnings to finance the
expansion of our business. Our future dividend policy will
depend on our earnings, capital requirements, expansion plans,
financial condition and other relevant factors.
11
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read together
with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements
and notes thereto and other financial information included
elsewhere in this Annual Report. The consolidated statements of
income data set forth below for the fiscal years ended March 31,
2006, 2005, and 2004 and the consolidated balance sheet data as
of March 31, 2006 and 2005 have been derived from our audited
consolidated financial statements which are included elsewhere in
this Form 10-K. The consolidated statements of income data set
forth below for the fiscal years ended March 31, 2003 and 2002
and the consolidated balance sheet data as of March 31, 2004,
2003 and 2002 have been derived from our audited consolidated
financial statements which are not included in this Form 10-K.
STATEMENTS OF INCOME
Fiscal Year Ended March 31,
----------------------------------------------------------------------
2006 2005 2004 2003 2002
----------------------------------------------------------------------
Sales $ 137,583,155 $ 108,357,747 $ 93,994,233 $ 54,974,916 $ 32,025,931
Cost of sales 83,244,366 64,700,002 55,824,406 31,517,639 18,894,493
Gross profit 54,338,789 43,657,745 38,169,827 23,457,277 13,131,438
Operating expenses 36,193,545 31,156,119 28,958,433 19,974,270 12,383,498
Net income 12,063,514 8,010,370 5,813,604 3,257,565 825,413
Net income per common share:
Basic 0.51 0.35 0.30 0.19 0.05
Diluted 0.50 0.34 0.25 0.16 0.04
Weighted average number of
common shares outstanding:
Basic 23,658,722 22,862,417 19,471,681 17,300,130 16,360,010
Diluted 24,211,955 23,833,189 23,689,866 20,749,515 19,739,493
BALANCE SHEET DATA
March 31,
----------------------------------------------------------------------
2006 2005 2004 2003 2002
----------------------------------------------------------------------
Working capital $ 34,968,771 $ 21,968,784 $ 11,338,004 $ 3,017,641 $ 690,588
Total assets 42,624,159 28,119,483 18,480,808 9,025,796 4,654,236
Total liabilities 4,984,630 3,902,419 4,486,299 3,433,108 3,071,536
Shareholders' equity 37,639,529 24,217,064 13,994,509 5,592,688 1,582,700
NON FINANCIAL DATA (UNAUDITED)
March 31,
----------------------------------------------------------------------
2006 2005 2004 2003 2002
----------------------------------------------------------------------
New customers acquired 624,000 510,000 572,000 414,000 275,000
Total accumulated customers(1) 2,455,000 1,831,000 1,321,000 749,000 335,000
(1) includes both active and inactive customers
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Executive Summary
- -----------------
PetMed Express was incorporated in the state of Florida in
January 1996. The Company's common stock is traded on the NASDAQ
under the symbol "PETS." Prior to the move to the NASDAQ, the
Company's shares had been traded on the over-the-counter bulletin
board. The Company began selling pet medications and other pet
health products in September 1996, and issued its first catalog
in the fall of 1997. This catalog displayed approximately 1,200
items, including prescription and non-prescription pet
medications, other pet health products and pet accessories. In
fiscal 2001, the Company focused its product line on
approximately 600 of the most popular pet medications and other
health products for dogs and cats. Presently, the Company's
product line includes approximately 750 of the most popular pet
medications and other health products for dogs, cats, and horses.
The Company markets its products through national television,
online, and direct mail/print advertising campaigns which direct
consumers to order by phone or on the Internet, and aim to
increase the recognition of the "1-800-PetMeds" brand name.
Currently, approximately 57% of all sales are generated via the
Internet compared to 53% last year.
The Company's sales consist of products sold mainly to retail
consumers and minimally to wholesale customers. Typically, the
Company's customers pay by credit card or check at the time the
order is shipped. The Company usually receives cash settlement
in two to three banking days for sales paid by credit cards,
which minimizes the accounts receivable balances relative to the
Company's sales. Certain wholesale customers are extended credit
terms, which usually require payment within 30 days of delivery.
The Company's sales returns average was approximately 1.5 % and
1.4 % of sales for the fiscal years ended March 31, 2006 and
2005, respectively. The twelve month average purchase was
approximately $77 and $76 per order for the fiscal years ended
March 31, 2006 and 2005, respectively.
Critical Accounting Policies
- ----------------------------
Our discussion and analysis of our financial condition and the
results of our operations are based upon our condensed
consolidated financial statements and the data used to prepare
them. The Company's condensed consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America. On an
ongoing basis we re-evaluate our judgments and estimates
including those related to product returns, bad debts,
inventories, long-lived assets, income taxes, litigation and
contingencies. We base our estimates and judgments on our
historical experience, knowledge of current conditions and our
beliefs of what could occur in the future considering available
information. Actual results may differ from these estimates
under different assumptions or conditions. Our estimates are
guided by observing the following critical accounting policies.
Revenue recognition
The Company generates revenue by selling pet medication
products primarily to retail consumers and minimally to wholesale
customers. The Company's policy is to recognize revenue from
product sales upon shipment, when the rights of ownership and
risk of loss have passed to the consumer. Outbound shipping and
handling fees are included in sales and are billed upon shipment.
Shipping 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 two to
three banking days. Credit card sales minimize accounts
receivable balances relative to sales. The Company maintains an
allowance for doubtful accounts for losses that the Company
estimates will arise from the customers' inability to make
required payments, arising from either credit card charge-backs
or insufficient funds checks. The Company determines its
estimates of the uncollectibility of accounts receivable by
analyzing historical bad debts and current economic trends. At
March 31, 2006 and 2005 the allowance for doubtful accounts was
approximately $23,000 and $37,000, respectively.
Valuation of inventory
Inventories consist of prescription and non-prescription pet
medications and pet supplies that are available for sale and are
priced at the lower of cost or market value using a weighted
average cost method. The Company writes down its inventory for
estimated obsolescence. The inventory reserve was approximately
$306,000 and $228,000 for the fiscal years ended March 31, 2006
and 2005, respectively.
13
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.
Advertising
The Company's advertising expense consists primarily of
television advertising, internet marketing, and direct mail/print
advertising. Television costs are expensed as the advertisements
are televised. Internet costs are expensed in the month
incurred and direct mail/print advertising costs are expensed
when the related catalog and postcards are produced, distributed
or superseded.
Accounting for income taxes
The Company accounts for income taxes under the provisions of
SFAS No. 109, Accounting for Income Taxes, which generally
requires recognition of deferred tax assets and liabilities for
the expected future tax benefits or consequences of events that
have been included in the condensed consolidated financial
statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on differences between the
financial reporting carrying values and the tax bases of assets
and liabilities, and are measured by applying enacted tax rates
and laws for the taxable years in which those differences are
expected to reverse.
Results of Operations
- ---------------------
The following should be read in conjunction with the Company's
Consolidated Financial Statements and the related notes thereto
included elsewhere herein. The following table sets forth, as a
percentage of sales, certain items appearing in the Company's
Consolidated Statements of Income:
Fiscal Year Ended March 31,
2006 2005 2004
------ ------ ------
Sales 100.0 % 100.0 % 100.0 %
Cost of sales 60.5 59.7 59.4
------ ------ ------
Gross profit 39.5 40.3 40.6
------ ------ ------
Operating expenses:
General and administrative 10.2 10.6 11.4
Advertising 15.7 17.7 18.8
Depreciation and amortizatio 0.4 0.5 0.6
------ ------ ------
Total operating expenses 26.3 28.8 30.8
------ ------ ------
Income from operations 13.2 11.5 9.8
------ ------ ------
Total other income (expense) 0.7 0.1 -
------ ------ ------
Income before provision for
income taxes 13.9 11.6 9.8
Provision for income taxes 5.1 4.2 3.6
------ ------ ------
Net income 8.8 % 7.4 % 6.2 %
====== ====== ======
14
Fiscal 2006 Compared to Fiscal 2005
Sales
- -----
Sales increased $29,225,000, or 27.0%, to $137,583,000 for the
year ended March 31, 2006, from $108,358,000 for the year ended
March 31, 2005. The increase in sales can be primarily
attributed to increased retail new orders, retail reorders and
wholesale sales, during the fiscal year.
The Company has committed certain amounts specifically
designated towards television, direct mail/print and online
advertising to stimulate sales, create brand awareness, and
acquire new customers. Retail reorder sales have increased by
approximately $19,648,000, or 28.6%, to approximately $88,367,000
for the fiscal year ended March 31, 2006, from approximately
$68,719,000 for the fiscal year ended March 31, 2005. Retail new
order sales have increased by approximately $8,280,000, or 22.3%,
to approximately $45,488,000 for the fiscal year ended March 31,
2006, from approximately $37,208,000 for the fiscal year ended
March 31, 2005. Wholesale sales have increased by approximately
$1,297,000, or 53.4%, to approximately $3,728,000 for the fiscal
year ended March 31, 2006, from approximately $2,431,000 for the
fiscal year ended March 31, 2005. We may limit our wholesale
sales in the future to focus our business on retail sales. The
Company acquired approximately 624,000 new customers for the year
ended March 31, 2006, compared to 510,000 new customers for the
same period in the prior year. The increase in retail sales
growth for fiscal 2006 compared to fiscal 2005 can be attributed
to increased advertising effectiveness, due to a more favorable
advertising environment, with more effective creative, and
discount offers. There can be no assurances that this trend will
continue due to increased price competition from veterinarians
and traditional and online retailers.
The majority of our product sales are affected by the seasons,
due to the seasonality of mainly heartworm and flea and tick
medications. For the quarters ended June 30, September 30,
December 31, and March 31 of fiscal 2006, the Company's sales
were approximately 32%, 28%, 19%, and 21%, respectively.
Cost of sales
- -------------
Cost of sales increased by $18,544,000, or 28.7%, to
$83,244,000 for the fiscal year ended March 31, 2006, from
$64,700,000 for the fiscal year ended March 31, 2005. The
increase in cost of sales is directly related to the increase in
retail and wholesale sales in fiscal 2006 as compared to fiscal
2005. As a percent of sales, the cost of sales was 60.5% in
fiscal 2006, as compared to 59.7% in fiscal 2005. The percentage
increase can be attributed to increases in our product and
freight costs, discounts given to our customers, and increases in
our wholesale sales, which have a lower gross profit percentage.
Gross profit
- ------------
Gross profit increased by $10,681,000, or 24.5%, to
$54,339,000 for the fiscal year ended March 31, 2006, from
$43,658,000 for the fiscal year ended March 31, 2005. Gross
profit as a percentage of sales for fiscal 2006 and 2005 was
39.5% and 40.3%, respectively. The gross profit percentage
decrease can be attributed to increases in our product and
freight costs, discounts given to our customers, and increases in
our wholesale sales, which have a lower gross profit percentage.
General and administrative expenses
- -----------------------------------
General and administrative expenses increased by $2,682,000,
or 23.5%, to $14,078,000 for the fiscal year ended March 31, 2006
from $11,396,000 for the fiscal year ended March 31, 2005.
However, general and administrative expense as a percentage of
sales was 10.2% compared to 10.6% for the fiscal years ended
March 31, 2006 and 2005, respectively. The increase in general
and administrative expenses for the year ended March 31, 2006 was
primarily due to the following: a $798,000 increase to payroll
expenses which can be attributed to the addition of new employees
in the customer care and pharmacy departments enabling the
company to sustain its growth; a $663,000 increase to
professional fees, primarily relating to increased pharmacist,
accounting, the majority relating to Sarbanes Oxley compliance,
and legal fees; a $646,000 increase to credit card and bank
service fees which is directly attributable to increased sales in
the period; a $183,000 increase to property expenses, relating to
unanticipated hurricane-related charges, mainly generator and
fuel expenses, during the third quarter and additional rent due
to our warehouse expansion; a $162,000 one-time charge relating
to state/county sales tax which was not collected on behalf of
our customers; a $110,000 increase to telephone expenses
resulting from receiving one time usage credits in the quarters
ended September 30, 2004 and December 31, 2004; a $85,000
increase to office expenses which can be directly attributed to
increased sales and unanticipated hurricane-related charges in
the period; a $36,000 increase to insurance expenses, relating to
an increase in premiums paid; and a $1,000 decrease to other
expenses.
15
Advertising expenses
- --------------------
Advertising expenses increased by approximately $2,385,000, or
approximately 12.4%, to approximately $21,571,000 for the fiscal
year ended March 31, 2006 from approximately $19,186,000 for the
fiscal year ended March 31, 2005. The increase in advertising
expenses for the fiscal year ended March 31, 2006 was due to the
Company's plan to commit certain amounts specifically designated
towards television, direct mail/print, and online advertising to
stimulate sales, create brand awareness, and acquire new
customers.
The advertising costs of acquiring a new customer, defined as
total advertising costs divided by new customers acquired, for
the fiscal year ended March 31, 2006 was $35, compared to $38 for
the same period the prior year. We can attribute this reduction
to an increase in advertising efficiency due to a more favorable
advertising environment. There can be no assurances made that
this favorable advertising environment will continue.
Historically, the advertising environment fluctuates due to
supply and demand. A less favorable advertising environment may
negatively impact new order sales. As a percentage of sales,
advertising expense was 15.7% in fiscal 2006, as compared to
17.7% in fiscal 2005. The Company currently anticipates
advertising as a percentage of sales to range from approximately
15.0% to 16.0% in fiscal 2007. However, the advertising
percentage will fluctuate quarter to quarter due to seasonality
and advertising availability. For the year ended March 31, 2006,
quarterly advertising expenses as a percentage of sales ranged
between 12% and 18%.
Depreciation and amortization
- -----------------------------
Depreciation and amortization decreased by approximately
$29,000, or 5.1%, to approximately $545,000 for the fiscal year
ended March 31, 2006 from approximately $574,000 for the fiscal
year ended March 31, 2005. This decrease to depreciation and
amortization expense for fiscal 2006 can be attributed to
decreased property and equipment additions since the first
quarter of fiscal 2005.
Other income
- ------------
Other income increased by approximately $788,000 to
approximately $890,000 for the fiscal year ended March 31, 2006,
from approximately $102,000 for the fiscal year ended March 31,
2005. The increase to other income can be primarily attributed
to increased interest income due to increases in the Company's
cash balance, which is swept into an interest bearing overnight
account and tax-free short term investment account, and to
advertising revenue generated from our website. Interest income
may decrease in future years as the Company utilizes its cash
balances on operating activities.
Provision for income taxes
- --------------------------
For the fiscal years ended March 31, 2006 and 2005, the
Company recorded an income tax provision for approximately
$6,972,000 and $4,593,000, respectively, which resulted in an
effective tax rate of 36.6% and 36.4%, respectively.
Net income
- ----------
Net income increased by approximately $4,054,000, or 50.6%, to
approximately $12,064,000 for the fiscal year ended March 31,
2006 from approximately $8,010,000 for the fiscal year ended
March 31, 2005. The significant increase was mainly attributable
to the Company's sales growth and profitable operations and the
leverage of general and administrative and advertising expenses.
Fiscal 2005 Compared to Fiscal 2004
Sales
- -----
Sales increased $14,364,000, or 15.3%, to $108,358,000 for the
year ended March 31, 2005, from $93,994,000 for the year ended
March 31, 2004. The increase in sales can be primarily
attributed to increased retail reorders and wholesale sales,
partially offset by decreased retail new order sales during the
fiscal year.
The Company has committed certain amounts specifically
designated towards television, direct mail/print and online
advertising to stimulate sales, create brand awareness, and
acquire new customers. Retail reorder sales have increased by
approximately $17,285,000, or 33.6%, to approximately $68,719,000
for the fiscal year ended March 31, 2005, from approximately
$51,434,000 for the fiscal year ended March 31, 2004. Retail new
order sales have decreased by approximately $4,908,000, or 11.7%,
to approximately $37,208,000 for the fiscal year ended March 31,
2005, from approximately $42,116,000 for the fiscal year ended
March 31, 2004. Wholesale sales have increased by approximately
$1,987,000, or 447%, to approximately $2,431,000 for the fiscal
year ended March 31, 2005, from approximately $444,000 for
the fiscal year ended March 31, 2004. The Company acquired
approximately 510,000 new customers for the year ended
16
March 31, 2005, compared to 572,000 new customers for the same
period in the prior year. The slow down in retail sales growth
for fiscal 2005 compared to fiscal 2004 can be attributed to
decreased advertising efficiency and increased competition both
from veterinarians and traditional and online retailers.
The majority of our product sales are affected by the seasons,
due to the seasonality of mainly heartworm and flea and tick
medications. For the quarters ended June 30, September 30,
December 31, and March 31 of fiscal 2005, the Company's sales
were approximately 33%, 26%, 19%, and 22%, respectively.
Cost of sales
- -------------
Cost of sales increased by $8,876,000, or 15.9%, to
$64,700,000 for the fiscal year ended March 31, 2005, from
$55,824,000 for the fiscal year ended March 31, 2004. The
increase in cost of sales is directly related to the increase in
retail and wholesale sales in fiscal 2005 as compared to fiscal
2004. As a percent of sales, the cost of sales was 59.7% in
fiscal 2005, as compared to 59.4% in fiscal 2004. The percentage
increase can be attributed to increases in wholesale sales which
had a higher cost of sales percentage.
Gross profit
- ------------
Gross profit increased by $5,488,000, or 14.4%, to $43,658,000
for the fiscal year ended March 31, 2005, from $38,170,000 for
the fiscal year ended March 31, 2004. Gross profit as a
percentage of sales for fiscal 2005 and 2004 was 40.3% and 40.6%,
respectively. The percentage decrease can be attributed to
increases in wholesale sales which had a lower gross profit
percentage.
General and administrative expenses
- -----------------------------------
General and administrative expenses increased by $642,000, or
6.0%, to $11,396,000 for the fiscal year ended March 31, 2005
from $10,754,000 for the fiscal year ended March 31, 2004.
However, general and administrative expense as a percentage of
sales was 10.6% and 11.4% for the fiscal years ended March 31,
2005 and 2004, respectively. The increase in general and
administrative expenses for the year ended March 31, 2005 was
primarily due to the following: a $336,000 increase in bank
service and credit card fees which can be directly attributed to
increased sales in fiscal 2005; a $259,000 increase to payroll
expenses due to the addition of new employees in the customer
care and pharmacy departments enabling the company to sustain its
growth; a $106,000 increase to property expenses relating to
additional rent due to our warehouse expansion; a $97,000
increase in insurance expenses, relating to additional premiums
paid for increases to insurance policy limits; and a $70,000
increase in other expenses which includes mainly office expenses.
Offsetting the increase were an $113,000 reduction to telephone
expenses, relating to one time usage credits received in fiscal
2005, and an $113,000 reduction to professional fees primarily
from a one-time NASDAQ listing fee in fiscal 2004.
Advertising expenses
- --------------------
Advertising expenses increased by approximately $1,532,000, or
approximately 8.7%, to approximately $19,186,000 for the fiscal
year ended March 31, 2005 from approximately $17,654,000 for the
fiscal year ended March 31, 2004. The increase in advertising
expenses for the fiscal year ended March 31, 2005 was due to the
Company's plan to commit certain amounts specifically designated
towards television, direct mail/print, and online advertising to
stimulate sales, create brand awareness, and acquire new
customers.
The advertising costs of acquiring a new customer, defined as
total advertising costs divided by new customers acquired, for
the fiscal year ended March 31, 2005 was $38, compared to $31 for
the same period the prior year. We can attribute this decrease
in advertising efficiency for the year ended March 31, 2005
compared to 2004 to the change in the advertising media mix
caused by a shortage of television advertising inventory, which
was due to increased advertiser demand resulting from the
strengthening economy and the presidential election. The
decrease in advertising efficiency may also be attributable to
increased competition from both veterinarians and traditional and
online retailers. As a percentage of sales, advertising expense
was 17.7% in fiscal 2005, as compared to 18.8% in fiscal 2004.
The percentage decrease can also be attributed to the shortage of
television advertising inventory mentioned above. The Company
expects advertising as a percentage of sales to range from
approximately 17.0% to 20.0% in fiscal 2006. However, the
advertising percentage will fluctuate quarter to quarter due to
seasonality and advertising availability.
Depreciation and amortization
- -----------------------------
Depreciation and amortization increased by approximately
$24,000, or 4.3%, to approximately $574,000 for the fiscal year
ended March 31, 2005 from approximately $550,000 for the fiscal
year ended March 31, 2004. The increase to depreciation and
amortization expense for fiscal 2005 can be attributed to
property and equipment additions.
17
Interest income
- ---------------
Interest income increased by approximately $89,000, or 917%,
to approximately $99,000 for the fiscal year ended March 31, 2005
from approximately $10,000 for the fiscal year ended March 31,
2004. The increase to interest income can be attributed to
increases in the Company's cash balance, which is swept into an
interest bearing overnight account and tax-free short term
investment accounts. Interest income may decrease in future
years as the Company utilizes its cash balances to increase
inventory levels.
Provision for income taxes
- --------------------------
For the fiscal years ended March 31, 2005 and 2004, the
Company recorded an income tax provision for approximately
$4,593,000 and $3,400,000, respectively, which resulted in an
effective tax rate of 36.4% and 36.9%, respectively.
Net income
- ----------
Net income increased by approximately $2,196,000, or 37.8%, to
approximately $8,010,000 for the fiscal year ended March 31, 2005
from approximately $5,814,000 for the fiscal year ended March 31,
2004. The significant increase was mainly attributable to the
Company's sales growth and profitable operations and the leverage
of general and administrative and advertising expenses.
Liquidity and Capital Resources
The Company's working capital at March 31, 2006 and 2005
was $34,969,000 and $21,969,000, respectively. The $13,000,000
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 $10,277,000 and
$8,349,000 for the years ended March 31, 2006 and 2005,
respectively. Net cash used in investing activities was $758,000
and $172,000 for the years ended March 31, 2006 and 2005,
respectively. This $586,000 increase to property and equipment
acquisitions can be directly attributed to the Company's
expansion in the warehouse, pharmacy and fulfillment operations,
to add additional computer equipment to further the Company's
growth and add back-up infrastructure, and to maintain existing
capital assets in fiscal 2006. Net cash provided by financing
activities was $1,016,000 and $1,225,000 for the years ended
March 31, 2006 and 2005. This $209,000 decrease can be
attributed to a decrease in the number of stock options being
exercised in fiscal 2006 compared to fiscal 2005.
As of March 31, 2006 and 2005 the Company had no outstanding
lease commitments except for the lease for its executive offices
and warehouse ("facility"). On May 18, 2005 the Company signed
an amendment to extend the current lease agreement through May
31, 2009. The amendment terms are similar to the existing lease
agreement, and the Company exercised its option to lease an
additional 3,600 square feet. On November 28, 2005 the Company
signed an amendment to its current lease agreement. The Company
agreed to lease an additional 7,000 square feet to expand its
warehouse and pharmacy. This addition to the warehouse and
pharmacy was necessary to increase the Company's capacity to
store additional inventory and expand its fulfillment operations.
Since its inception, the Company has primarily funded its
growth through the private placement of securities. The Company
had financed certain equipment acquisitions with capital leases.
The Company's $5,000,000 line of credit with SouthTrust Bank,
N.A. expired on August 28, 2004. On November 2, 2004 the Company
signed a new $6,000,000 line of credit agreement with RBC Centura
Bank ("RBC"). The $6,000,000 line of credit, which upon 30 days
notice had a provision to increase the line to $7,500,000, was
effective through November 2, 2005. On October 31, 2005, the
Company and RBC agreed to extend the maturity date of the
existing line of credit for a period of 90 days. On February 3,
2006, the Company and RBC agreed to extend the maturity date of
the existing line of credit for an additional 45 days. The
Company determined that it no longer had a need for this line of
credit and it was not renewed. At March 31, 2006 and 2005, there
was no balance outstanding under either line of credit agreement.
Presently, the Company has approximately $500,000 planned for
capital expenditure commitments to further the Company's growth
during fiscal 2007, which will be funded through cash from
operations. The Company's source of working capital includes
cash from operations and the exercise of stock options. The
Company presently has no need for other alternative sources of
working capital and at this time, have no commitments or plans to
obtain additional capital. If in the future, the Company seeks
to raise additional capital through the sale of equity
securities, no assurances can be given that the Company will be
successful in obtaining additional capital, or that such capital
will be available in terms acceptable to the Company. Further,
there can be no assurances that even if such additional capital
is obtained that the Company will sustain profitability or
positive cash flow.
18
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
issued SFAS No. 123R, Share Based Payment, which is a revision of
SFAS No. 123. This Statement supersedes APB No. 25, which is the
basis for the Company's current policy on accounting for stock-
based compensation. SFAS No. 123R will require companies to
recognize as an expense in the Statement of Income the grant-date
fair value of stock options and other equity-based compensation
issued to employees. SFAS No. 123R is effective for the Company
as of April 1, 2006, the beginning of the quarter ending June 30,
2006. Under the methods of adoption allowed by the standard,
awards that are granted, modified, or settled after the date of
adoption should be measured and accounted for in accordance with
SFAS No. 123R. The fair value of unvested equity-classified
awards that were granted prior to the effective date should be
measured in accordance with SFAS No. 123 and recognized as
compensation expense in the Statement of Income.
The Company does not believe that any other recently issued,
but not yet effective, accounting standard, if currently adopted,
will have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may
occur in the value of financial instruments as a result of
movements in interest rates, foreign currency exchange rates and
commodity prices. Our financial instruments include cash and
cash equivalents, accounts receivable, accounts payable, line of
credit, and debt obligations. The book values of cash
equivalents, accounts receivable, and accounts payable are
considered to be representative of fair value because of the
short maturity of these instruments. At March 31, 2006, we had
no debt obligations.
We do not utilize financial instruments for trading purposes
and we do not hold any derivative financial instruments that
could expose us to significant market risk. Our exposure to
market risk for changes in interest rates related primarily to
our obligations under our line of credit, which was not renewed
in fiscal 2006.
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.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PETMED EXPRESS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm 22
Consolidated Balance Sheets as of March 31, 2006
and March 31, 2005 23
Consolidated Statements of Income for each of the three
years in the period ended March 31, 2006 24
Consolidated Statements of Changes in Shareholders'
Equity for each of the three years in the period
ended March 31, 2006 25
Consolidated Statements of Cash Flows for each of the
three years in the period ended March 31, 2006 26
Notes to Consolidated Financial Statements 27
Report of Management on Internal Control Over
Financial Reporting 38
Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting 39
21
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, 2006 and 2005, 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, 2006. 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, 2006 and 2005, and the results of their operations and
their cash flows for each of the three years in the period ended
March 31, 2006, in conformity with U.S. generally accepted
accounting principles.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company's internal control over financial
reporting as of March 31, 2006, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated May 11, 2006 expressed an unqualified opinion
thereon.
/s/ Goldstein Golub Kessler LLP
- -------------------------------
Goldstein Golub Kessler LLP
New York, New York
May 11, 2006
22
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
2006 2005
------------ ------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 23,216,907 $ 12,680,962
Accounts receivable, less allowance for doubtful
accounts of $23,000 and $37,000, respectively 1,155,781 1,796,756
Inventories - finished goods 14,997,675 11,180,333
Prepaid expenses and other current assets 583,038 213,152
------------ ------------
Total current assets 39,953,401 25,871,203
Property and equipment, net 1,497,589 1,286,267
Deferred income taxes 794,002 582,846
Intangible asset 365,000 365,000
Other assets 14,167 14,167
------------ ------------
Total assets $ 42,624,159 $ 28,119,483
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 3,052,953 $ 2,724,990
Income taxes payable 958,318 601,535
Accrued expenses and other current liabilities 973,359 575,894
------------ ------------
Total liabilities 4,984,630 3,902,419
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized;
2,500 convertible shares issued and outstanding with a
liquidation preference of $4 per share 8,898 8,898
Common stock, $.001 par value, 40,000,000 shares authorized;
23,967,390 and 23,458,725 shares issued and outstanding, respectively 23,967 23,459
Additional paid-in capital 13,433,054 12,074,611
Retained earnings 24,173,610 12,110,096
------------ ------------
Total shareholders' equity 37,639,529 24,217,064
------------ ------------
Total liabilities and shareholders' equity $ 42,624,159 $ 28,119,483
============ ============
See accompanying notes to consolidated financial statements
23
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended March 31,
2006 2005 2004
------------ ------------ ------------
Sales $ 137,583,155 $ 108,357,747 $ 93,994,233
Cost of sales 83,244,366 64,700,002 55,824,406
------------ ------------ ------------
Gross profit 54,338,789 43,657,745 38,169,827
------------ ------------ ------------
Operating expenses:
General and administrative 14,078,343 11,396,320 10,754,427
Advertising 21,570,667 19,185,982 17,653,614
Depreciation and amortization 544,535 573,817 550,392
------------ ------------ ------------
Total operating expenses 36,193,545 31,156,119 28,958,433
------------ ------------ ------------
Income from operations 18,145,244 12,501,626 9,211,394
------------ ------------ ------------
Other income (expense):
Loss on disposal of property and equipment (1,719) - -
Interest expense - (965) (14,546)
Interest income 676,083 99,044 9,739
Other, net 215,586 3,710 6,938
------------ ------------ ------------
Total other income (expense) 889,950 101,789 2,131
------------ ------------ ------------
Income before provision for income taxes 19,035,194 12,603,415 9,213,525
Provision for income taxes 6,971,680 4,593,045 3,399,921
------------ ------------ ------------
Net income $ 12,063,514 $ 8,010,370 $ 5,813,604
============ ============ ============
Net income per common share:
Basic $ 0.51 $ 0.35 $ 0.30
============ ============ ============
Diluted $ 0.50 $ 0.34 $ 0.25
============ ============ ============
Weighted average number of common shares outstanding:
Basic $ 23,658,722 $ 22,862,417 $ 19,471,681
============ ============ ============
Diluted $ 24,211,955 $ 23,833,189 $ 23,689,866
============ ============ ============
See accompanying notes to consolidated financial statements
24
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Fiscal years ended March 31, 2004, March 31, 2005 and March 31, 2006
Retained
Convertible Common Additional Earnings
Preferred Stock Stock Paid-In (Accumulated
-------------------- -----------------------
Shares Amounts Shares Amounts Capital Deficit) Total
----------------------------------------------------------------------------------------
Balance, March 31, 2003 2,500 8,898 18,460,878 18,461 7,279,207 (1,713,878) 5,592,688
Issuance of common
stock from exercise of
stock options - - 1,179,596 1,179 1,285,366 - 1,286,545
Issuance of common
stock from exercise of
warrants - - 2,219,583 2,220 710,580 - 712,800
Tax benefit related to
stock options exercised - - - - 588,872 - 588,872
Net income - - - - - 5,813,604 5,813,604
-------- ------- ------------ -------- ----------- ----------- ------------
Balance, March 31, 2004 2,500 8,898 21,860,057 21,860 9,864,025 4,099,726 13,994,509
Issuance of common
stock from exercise of
stock options - - 1,058,668 1,059 1,076,130 - 1,077,189
Issuance of common
stock from exercise of
warrants and other - - 540,000 540 215,707 - 216,247
Tax benefit related to
stock options exercised - - - - 918,749 - 918,749
Net income - - - - - 8,010,370 8,010,370
-------- ------- ------------ -------- ----------- ----------- ------------
Balance, March 31, 2005 $ 2,500 $ 8,898 $ 23,458,725 $ 23,459 $ 12,074,611 $ 12,110,096 $ 24,217,064
Issuance of common
stock from exercise of
stock options - - 508,665 508 1,015,523 - 1,016,031
Tax benefit related to
stock options exercised - - - - 342,920 - 342,920
Net income - - - - - 12,063,514 12,063,514
-------- ------- ------------ -------- ----------- ----------- ------------
Balance, March 31, 2006 $ 2,500 $ 8,898 $ 23,967,390 $ 23,967 $ 13,433,054 $ 24,173,610 $ 37,639,529
======== ======= ============ ======== =========== =========== ============
See accompanying notes to consolidated financial statements
25
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
2006 2005 2004
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 12,063,514 $ 8,010,370 $ 5,813,604
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 544,535 573,817 550,392
Tax benefit related to stock options exercised 342,920 918,749 588,872
Deferred income taxes (211,156) (1,490) -
Loss on disposal of property and equipment 1,719 - -
Bad debt expense (recovery) (1,709) 16,092 7,432
(Increase) decrease in operating assets
and increase (decrease) in liabilities:
Accounts receivable 642,684 (679,547) (488,850)
Inventories - finished goods (3,817,342) (475) (6,911,712)
Prepaid expenses and other current assets (369,886) 19,066 245,890
Other assets - 7,655 178,333
Accounts payable 327,963 (548,072) 702,603
Income taxes payable 356,783 179,090 251,693
Accrued expenses and other current liabilities 397,465 (146,456) 167,338
------------ ------------ ------------
Net cash provided by operating activities 10,277,490 8,348,799 1,105,595
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (758,176) (171,757) (741,740)
Net proceeds from the sale of property and equipment 600 - -
------------ ------------ ------------
Net cash used in investing activities (757,576) (171,757) (741,740)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants
and other transactions 1,016,031 1,293,436 1,999,345
Payments on the loan obligation - (68,442) (68,443)
------------ ------------ ------------
Net cash provided by financing activities 1,016,031 1,224,994 1,930,902
------------ ------------ ------------
Net increase in cash and cash equivalents 10,535,945 9,402,036 2,294,757
Cash and cash equivalents, at beginning of the year 12,680,962 3,278,926 984,169
------------ ------------ ------------
Cash and cash equivalents, at end of the year $ 23,216,907 $ 12,680,962 $ 3,278,926
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ 884 $ 14,302
============ ============ ============
Cash paid for income taxes $ 6,483,132 $ 3,496,696 $ 2,513,214
============ ============ ============
See accompanying notes to consolidated financial statements
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Organization
PetMed Express, Inc. and subsidiaries, d/b/a 1-800-PetMeds,
(the "Company") is a leading nationwide pet pharmacy. The
Company markets and sells prescription and non-prescription
pet medications and other health products for dogs, cats
and horses direct to the consumer.
The Company markets its products through national
television, on-line and direct mail/print advertising
campaigns, which aim to increase the recognition of the
"1-800-PetMeds" brand name, increase traffic on its website
at www.1800petmeds.com, acquire new customers, and maximize
-------------------
repeat purchases. The majority of all of the Company's
sales are to residents in the United States. The Company's
executive offices are located in Pompano Beach, Florida.
The Company's fiscal year end is March 31. References
herein to fiscal 2006, 2005, or 2004 refer to the Company's
fiscal years ended March 31, 2006, 2005 and 2004,
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 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 two 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 the
customers' inability to make required payments, arising
from either credit card charge-backs or insufficient funds
checks. The Company determines its estimates of the
uncollectibility of accounts receivable by analyzing
historical bad debts and current economic trends. At March
31, 2006 and 2005 the allowance for doubtful accounts was
approximately $23,000 and $37,000, 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, 2006
and 2005, consist of the Company's cash accounts, overnight
repurchase agreements, and short-term investments with a
maturity of three months or less. The carrying amount of
cash equivalents approximates fair value. The Company
maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company
has not experienced any losses in such accounts.
Use of Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (Continued)
Inventories
Inventories consist of prescription and non-prescription
pet medications and pet supplies that are available for
sale and are priced at the lower of cost or market value
using a weighted average cost method. The Company writes
down its inventory for estimated obsolescence. The
inventory reserve was approximately $306,000 and $228,000
at March 31, 2006 and 2005, 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. 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 expenses consists primarily of
television advertising, internet marketing, and direct
mail/print advertising. Television costs are expensed as
the advertisements are televised. Internet costs are
expensed in the month incurred and direct mail/print
advertising costs are expensed when the related catalog and
postcards are produced, distributed or superseded.
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
approximated fair value as their interest rates
approximated current market rates.
Comprehensive Income
The Company applies 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.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (Continued)
Accounting for Stock-Based Compensation
The Company accounts for employee stock options using the
intrinsic value method as prescribed by Accounting
Principles Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees. The Company follows the
disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, for employee stock options. Had
the Company determined employee compensation cost based on
the fair value at the grant date for its stock options
under SFAS No. 123, the Company's net income would have
been decreased to the pro forma amounts indicated below:
Year Ended March 31, 2006 2005 2004
- -------------------- ---------- ---------- ----------
Reported net income: $ 12,063,514 $ 8,010,370 $ 5,813,604
Deduct: total stock-based
employee compensation expense
determined under fair-value based
method for all awards, net of
related tax effects 596,434 501,244 289,907
---------- ---------- ----------
Pro forma net income: $ 11,467,080 $ 7,509,126 $ 5,523,697
========== ========== ==========
Reported basic net income per share: $ 0.51 $ 0.35 $ 0.30
========== ========== ==========
Pro forma basic net income per share: $ 0.48 $ 0.33 $ 0.28
========== ========== ==========
Reported diluted net income per share: $ 0.50 $ 0.34 $ 0.25
========== ========== ==========
Pro forma diluted net income per share: $ 0.48 $ 0.32 $ 0.23
========== ========== ==========
The per share weighted-average fair value of stock options
granted during fiscal 2006, 2005, and 2004 was $3.51,
$5.45, and $4.13, 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 66 percent, 86 percent, and 68
percent, respectively.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
issued SFAS No. 123R, Share Based Payment, which is a
revision of SFAS No. 123. This Statement supersedes APB
No. 25, which is the basis for the Company's current policy
on accounting for stock-based compensation. SFAS No. 123R
will require companies to recognize as an expense in the
Statement of Income the grant-date fair value of stock
options and other equity-based compensation issued to
employees. SFAS No. 123R is effective for the Company as
of April 1, 2006, the beginning of the quarter ending June
30, 2006. Under the methods of adoption allowed by the
standard, awards that are granted, modified, or settled
after the date of adoption should be measured and accounted
for in accordance with SFAS No. 123R. The fair value of
unvested equity-classified awards that were granted prior
to the effective date should be measured in accordance with
SFAS No. 123 and recognized as compensation expense in the
Statement of Income.
Previously reported amounts may be restated for all periods
presented or adopted at the beginning of the fiscal year to
reflect the SFAS No. 123R amounts in the Statement of
Income. Pro forma disclosures about the fair value method
and the impact on net income and net income per common
share appear in the above table. The Company is evaluating
the requirements of SFAS No. 123R and expects that the
adoption of SFAS No. 123R may have a material impact on its
consolidated statements of income and earnings per share,
similar to the current pro forma disclosures under FAS 123
as per above.
The Company does not believe that any other recently
issued, but not yet effective, accounting standard, if
currently adopted, will have a material effect on the
Company's consolidated financial position, results of
operations or cash flows.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Property and Equipment
Major classifications of property and equipment consist of
the following:
March 31,
2006 2005
---------- ----------
Leasehold improvements $ 409,164 $ 384,445
Computer software 427,447 391,197
Furniture, fixtures and equipment 2,456,695 2,361,438
Equipment and software under capital lease - 113,398
---------- ----------
3,293,306 3,250,478
Less: accumulated depreciation and amortization (1,795,717) (1,964,211)
---------- ----------
Property and equipment, net $ 1,497,589 $ 1,286,267
=========== ===========
Amortization expense for equipment and software under
capital leases was approximately $0, $10,000, and $35,000,
for the years ended March 31, 2006, 2005, and 2004,
respectively.
(3) Accrued Expenses and Other Liabilities
Major classifications of accrued expenses and other
liabilities consist of the following:
March 31,
2006 2005
---------- ----------
Accrued professional expenses $ 300,500 $ 126,250
Accrued credit card fees 232,022 39,880
Accrued salaries and benefits 170,846 96,017
Accrued advertising expenses 99,000 177,000
Other accrued liabilities 170,991 136,747
---------- ----------
Accrued expenses and other liabilities $ 973,359 $ 575,894
========== ==========
(4) Line of Credit Agreement
The Company's $6,000,000 line of credit, which upon 30 days
notice had a provision to increase the line to $7,500,000,
was effective through November 2, 2005. On October 31,
2005, the Company and RBC Centura Bank ("RBC") agreed to
extend the maturity date of the existing line of credit for
a period of 90 days. On February 3, 2006, the Company and
RBC agreed to extend the maturity date of the existing line
of credit for an additional 45 days. The Company
determined that it no longer had a need for this line of
credit and it was not renewed.
(5) Shareholders' Equity
Preferred Stock
In April 1998, the Company issued 250,000 shares of its
$.001 par value preferred stock at a price of $4.00 per
share, less issuance costs of $112,187. Each share of the
preferred stock is convertible into approximately 4.05
shares of common stock at the election of the shareholder.
The shares have a liquidation value of $4.00 per share and
may pay dividends at the sole discretion of the Company.
The Company does not anticipate paying dividends to the
preferred shareholders in the foreseeable future. Each
share of preferred stock is entitled to one vote on all
matters submitted to a vote of shareholders of the Company.
As of March 31, 2006 and 2005, 2,500 shares of the
convertible preferred stock remained unconverted and
outstanding.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Income Taxes
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The tax effects of
temporary differences that give rise to significant
portions of deferred tax assets and deferred tax
liabilities are as follows:
March 31,
2006 2005
---------- ----------
Deferred tax assets:
Bad debt and inventory reserves $ 123,991 $ 97,941
Accrued expenses 233,644 132,095
Net operating loss carryforward 1,139,232 1,218,715
---------- ----------
Deferred tax assets 1,496,867 1,448,751
Less: valuation allowance (638,066) (717,549)
---------- ----------
Total deferred tax assets 858,801 731,202
Deferred tax liabilities:
Depreciation (64,799) (148,356)
---------- ----------
Total net deferred taxes $ 794,002 $ 582,846
========== ==========
The change in the valuation allowance for the years ended
March 31, 2006 and 2005 was approximately $79,000 and
$86,000, respectively. At March 31, 2006, the Company had
net operating loss carryforwards of approximately
$3,027,000. The net operating loss carryforwards expire in
the years 2013 through 2020. The use of such net operating
loss carryforwards is limited to approximately $266,000
annually due to the November 22, 2000 change of control.
The components of the income tax provision consist of the
following:
Year Ended March 31,
2006 2005 2004
---------- ---------- ----------
Current taxes
Federal $ 6,114,087 $ 3,911,564 $ 2,902,988
State 1,046,607 682,971 496,933
---------- ---------- ----------
Total current taxes 7,160,694 4,594,535 3,399,921
---------- ---------- ----------
Deferred taxes
Federal (161,388) (1,490) -
State (27,626) - -
---------- ---------- ----------
Total deferred taxes (189,014) (1,490) -
---------- ---------- ----------
Total provision for income taxes $ 6,971,680 $ 4,593,045 $ 3,399,921
========== ========== ==========
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Income Taxes (Continued)
The reconciliation of income tax provision computed at the
U.S. federal statutory tax rates to income tax expense is
as follows:
Year Ended March 31,
2006 2005 2004
---------- ---------- ----------
Income taxes at U.S. statutory rates $ 6,471,966 $ 4,285,161 $ 3,132,599
State income taxes, net of federal tax benefit 690,978 457,504 334,451
Permanent differences (186,470) 9,178 992
Other 74,689 (72,445) 66,743
Change in valuation allowance (79,483) (86,353) (134,864)
---------- ---------- ----------
Total provision for income taxes $ 6,971,680 $ 4,593,045 $ 3,399,921
========== ========== ==========
(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 851,170 and 1,166,002 options
outstanding under the Plan at March 31, 2006 and 2005,
respectively. In addition the Company issued options prior
to July 31, 1998, which 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, 2003 2,743,600 1.06
Options Granted 455,500 7.94
Options Exercised (1,179,596) 1.09
Options Canceled (167) 4.50
---------- --------
Balance at March 31, 2004 2,019,337 2.60
Options Granted 230,500 8.18
Options Exercised (1,058,668) 1.02
Options Canceled (25,167) 4.66
---------- --------
Balance at March 31, 2005 1,166,002 5.10
Options Granted 200,500 6.60
Options Exercised (508,665) 2.00
Options Canceled (6,667) 6.72
---------- --------
Balance at March 31, 2006 851,170 $ 7.28
========== ========
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Stock Options and Warrants (Continued)
The following table summarizes information for options
currently outstanding and exercisable at March 31, 2006:
Options Outstanding Options Exercisable
----------------------------------- -------------------
Weighted- Weighted- Weighted-
average average average
Exercise Remaining Exercise Exercise
Price Range Number Life Price Number Price
---------------- ----------------------------------- --------------------
$1.05 - $ 1.90 136,666 1.62 years $ 1.23 136,666 $ 1.23
3.45 - 6.50 37,169 3.18 years 3.45 13,335 3.45
6.60 - 7.90 240,500 3.31 years 6.67 13,333 7.03
8.00 - 10.64 436,835 3.31 years 9.84 227,500 10.11
---------------- ----------------------------------- ------------------
$ 1.05 - $10.64 851,170 3.07 years $ 7.28 390,834 $ 6.67
================ =================================== ==================
At March 31, 2006 and 2005, the number of options
exercisable was 390,834 and 546,834, respectively, and the
weighted-average exercise price of those options was $6.67
and $2.96, respectively. Adjustments are made for options
forfeited prior to vesting.
Warrants
On November 22, 2000, Tricon Holdings, LLC, a Florida
limited liability corporation ("Tricon"), acquired
10,000,000 shares of the Company's authorized and unissued
shares of common stock and warrants to purchase 3,000,000
shares of the Company's authorized and unissued shares of
common stock. The warrants were exercisable at $.33 per
share 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. As of March 31, 2005 all of the
3,000,000 warrants issued on November 22, 2000 were
exercised.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Net Income Per Share
In accordance with the provisions of SFAS No. 128,
"Earnings Per Share," basic net income per share is
computed by dividing net income available to common
shareholders by the weighted average number of common
shares outstanding during the period. Diluted net income
per share includes the dilutive effect of potential stock
issuances, calculated using the treasury stock method.
Outstanding stock options, warrants, and convertible
preferred shares issued by the Company represent the only
dilutive effect reflected in diluted weighted average
shares outstanding. The following is a reconciliation of
the numerators and denominators of the basic and diluted
net income per share computations for the periods
presented:
Year Ended March 31,
2006 2005 2004
---------- ---------- ----------
Net income (numerator):
Net income $ 12,063,514 $ 8,010,370 $ 5,813,604
=========== ========== ==========
Shares (denominator)
Weighted average number of common shares
outstanding used in basic computation 23,658,722 22,862,417 19,471,681
Common shares issuable upon exercise
of stock options and warrants 543,108 960,647 4,208,060
Common shares issuable upon conversion
of preferred shares 10,125 10,125 10,125
---------- ---------- ----------
Shares used in diluted computation 24,211,955 23,833,189 23,689,866
========== ========== ==========
Net income per common share:
Basic $ 0.51 $ 0.35 $ 0.30
========== ========== ==========
Diluted $ 0.50 $ 0.34 $ 0.25
========== ========== ==========
At March 31, 2006, all common stock options were included
in the diluted net income per share computation as their
exercise prices were less than the average market price of
the common shares for the period. At March 31, 2005 and
2004, 485,500 and 305,000 common stock options,
respectively, with a weighted average exercise price of
$9.69 and $10.16, 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, therefore the effect would
have been anti-dilutive.
(9) Valuation and Qualifying Accounts
Activity in the Company's valuation and qualifying accounts
consists of the following:
Year Ended March 31,
2006 2005 2004
---------- ---------- ----------
Allowance for doubtful accounts:
Balance at beginning of period 36,535 22,987 16,644
Provision (recovery) for doubtful accounts (1,709) 16,092 7,702
Write-off of uncollectible accounts receivable (11,400) (2,544) (1,359)
---------- ---------- ----------
Balance at end of period 23,426 36,535 22,987
========== ========== ==========
Valuation allowance for deferred tax assets:
Balance at beginning of period 717,549 803,902 938,766
(Deletions) / additions (79,483) (86,353) (134,864)
---------- ---------- ----------
Balance at end of period 638,066 717,549 803,902
========== ========== ==========
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Commitments and Contingencies
Legal Matters
The Company is a defendant in a lawsuit, filed in August
2002, in Texas state district court seeking injunctive and
monetary relief styled Texas State Board of Pharmacy and
State Board of Veterinary Medical Examiners v. PetMed
Express, Inc. Cause No.GN-202514, in the 201st Judicial
District Court, Travis County, Texas. The Company in its
initial pleading denied the allegations contained therein.
The Company is vigorously defending, 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. We are currently negotiating a settlement of the
matter, although there can be no assurances that the
negotiations will be successful. Thus, at this stage it is
difficult to assess the outcome or estimate any potential
loss in the event of an adverse outcome.
On January 19, 2006, PetMed Express, Inc. was added as a
defendant in the matter of Yali Golan v. Marc Puleo (former
President and current Chairman of the Board of Directors of
the Company), filed in the Circuit Court of the Eleventh
Judicial Circuit in and for Miami-Dade County, Florida
which had originally been filed solely against Dr. Puleo in
March 2003. This action is based upon allegations by the
plaintiff that Dr. Puleo individually entered into a
written agreement with the plaintiff (the purported
"General Agreement," of which the plaintiff has not
produced an original document) which in pertinent part
granted plaintiff 50% of any salary, stock or stock options
received by Dr. Puleo from the Company for so long as the
Company remains in business. The plaintiff now alleges that
the Company's past and continuing failure to disclose the
purported General Agreement in filings with the SEC has
caused the plaintiff to suffer damages. The plaintiff is
seeking a judgment against the Company for specific
performance and unspecified damages, pre- and post-judgment
interest, court fees and such other relief as the court
deems appropriate. The Company believes that, based on
information currently available to it, the claims being
asserted against it are factually and legally without
merit, and the Company intends to vigorously defend against
such claims.
Routine Proceedings
The Company is a party to routine litigation and
administrative complaints incidental to its business.
Management does not believe that the resolution of any or
all of such routine litigation and administrative
complaints is likely to have a material adverse effect on
the Company's financial condition or results of operations.
The Company has settled complaints that had been filed with
various states' pharmacy boards in the past. There can be
no assurances made that other states will not attempt to
take similar actions against the Company in the future.
Legal costs related to the above matters are expensed as
incurred.
Employment Agreements
On March 16, 2001, the Company entered into an employment
agreement with its Chief Executive Officer ("CEO"),
Menderes Akdag ("Mr. Akdag"). Under the terms of this
three-year agreement the Company paid the CEO an annual
salary of $150,000 for the first six months of the
agreement, and thereafter his annual salary was increased
to $200,000. The Company also granted the CEO options to
purchase 750,000 shares of its common stock under the
Company's 1998 Stock Option Plan at an exercise price of
$.32 per share, which vested at the rate of 187,500 options
on each of March 16, 2001, 2002, 2003 and 2004.
On March 16, 2004, the Company amended the CEO's existing
employment agreement. The amendments are as follows: the
term of the agreement was for three years, commencing on
March 16, 2004; Mr. Akdag's salary was increased to
$250,000 per year throughout the term of the agreement, and
Mr. Akdag was 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.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Commitments and Contingencies (Continued)
Operating Lease
The Company leases its executive offices and warehouse
facility under a non-cancelable operating lease. The
Company is responsible for certain maintenance costs, taxes
and insurance under this lease. On May 18, 2005 the
Company signed an amendment to extend the current lease
agreement through May 31, 2009. The amendment terms are
similar to the existing lease agreement, and the Company
exercised its option to lease an additional 3,600 square
feet. On November 28, 2005 the Company signed a fourth
amendment to its current lease agreement. The Company
agreed to lease an additional 7,000 square feet to expand
its warehouse and pharmacy. This addition to the warehouse
and pharmacy was necessary to increase the Company's
capacity to store additional inventory and expand its
fulfillment operations. Under the terms of the new
amendments the Company will be leasing a total 50,000
square feet through May 31, 2009. The future minimum
annual lease payments are as follows:
Years Ending March 31,
----------------------
2007 481,000
2008 500,000
2009 520,000
2010 87,000
----------
Total lease payments $ 1,588,000
===========
Rent expense was $435,000, $383,000 and $330,000 for the
years ended March 31, 2006, 2005 and 2004, respectively.
(11) 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,
2006 2005 2004
---------- ---------- ----------
Prescription medications 29% 30% 30%
Non-prescription medications 70% 69% 69%
Shipping and handling charges and other 1% 1% 1%
---------- ---------- ----------
Total 100% 100% 100%
========== ========== ==========
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data for fiscal
2006 and 2005 is as follows:
Quarter Ended: June 30, 2005 September 30, 2005 December 31, 2005 March 31, 2006
- -------------- ---------------------------------------------------------------------
Sales $ 43,631,758 $ 38,652,674 $ 25,890,095 $ 29,408,628
Gross Profit $ 16,858,586 $ 14,850,852 $ 10,276,380 $ 12,352,971
Income from operations $ 5,273,844 $ 3,987,598 $ 3,891,063 $ 4,992,739
Net income $ 3,541,586 $ 2,710,826 $ 2,672,092 $ 3,139,010
Diluted net income per common share $ 0.15 $ 0.11 $ 0.11 $ 0.13
Quarter Ended: June 30, 2004 September 30, 2004 December 31, 2004 March 31, 2005
- -------------- ---------------------------------------------------------------------
Sales $ 35,288,528 $ 28,754,697 $ 20,782,837 $ 23,531,685
Gross Profit $ 13,861,809 $ 11,613,141 $ 8,445,527 $ 9,737,268
Income from operations $ 2,726,016 $ 2,856,588 $ 3,129,631 $ 3,789,391
Net income $ 1,818,138 $ 1,811,655 $ 1,957,111 $ 2,423,466
Diluted net income per common share $ 0.08 $ 0.08 $ 0.08 $ 0.10
37
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for the preparation and
integrity of the Consolidated Financial Statements appearing in
our Annual Report on Form 10-K. The financial statements were
prepared in conformity with generally accepted accounting
principles appropriate in the circumstances and, accordingly,
include certain amounts based on our best judgments and
estimates. Financial information in the Annual report of Form
10-K is consistent with that in the financial statements.
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting,
as such term is defined in Rules 13a-15(f) under the Securities
Exchange Act of 1934 ("Exchange Act"). The Company's internal
control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of the Consolidated Financial
Statements. Our internal control over financial reporting is
supported by a team of consultants and appropriate reviews by
management, written policies and guidelines, careful selection
and training of qualified personnel and a written Corporate Code
of Business Conduct and Ethics adopted by our Company's Board of
Directors, applicable to all Company Directors and all officers
and employees of our Company and subsidiaries.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements and
even when determined to be effective, can only provide reasonable
assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
The Audit Committee ("Committee") of our Company's Board of
Directors, comprised solely of Directors who are independent in
accordance with the requirements of the Nasdaq National Market
listing standards, the Exchange Act and the Company's Corporate
Governance Guidelines, meets with the independent auditors and
management periodically to discuss internal control over
financial reporting and auditing and financial reporting matters.
The Committee reviews with the independent auditors the scope and
results of the audit effort. The Committee also meets
periodically with the independent auditors without management
present to ensure that the independent auditors have free access
to the Committee. Our Audit Committee's Report can be found in
the Company's 2006 Proxy Statement.
Management assessed the effectiveness of the Company's internal
control over financial reporting as of March 31, 2006. In making
this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control - Integrated Framework. Based on our
assessment, management believes that the Company maintained
effective internal control over financial reporting as of March
31, 2006,
The Company's independent auditors, Goldstein Golub Kessler LLP,
a registered public accounting firm, are appointed by the Audit
Committee of the Company's Board of Directors, subject to
ratification by our Company's shareholders. Goldstein Golub
Kessler LLP have audited and reported on the Consolidated
Financial Statements of PetMed Express, Inc. and subsidiaries,
management's assessment of the effectiveness of the Company's
internal control over financial reporting and the effectiveness
of the Company's management's assessment of the effectiveness of
our internal control over financial reporting. The reports of
the independent auditors are contained in this annual report.
/s/ Menderes Akdag
- --------------------
Menderes Akdag
Chief Executive Officer, President, Director
May 11, 2006
/s/ Bruce S. Rosenbloom
- -------------------------
Bruce S. Rosenbloom
Chief Financial Officer
May 11, 2006
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
PetMed Express, Inc.:
We have audited management's assessment, included in the
accompanying Management's Report on Internal Control over
Financial Reporting, that PetMed Express, Inc. maintained
effective internal control over financial reporting as of March
31, 2006, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). PetMed Express,
Inc.'s management is responsible for maintaining effective
internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of
the company's internal control over financial reporting based on
our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that PetMed Express, Inc.
maintained effective internal control over financial reporting as
of March 31, 2006 is fairly stated, in all material respects,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Also in our opinion, PetMed
Express, Inc. maintained, in all material respects, effective
internal control over financial reporting as of March 31, 2006,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
March 31, 2006 consolidated financial statements of PetMed
Express, Inc. and our report dated May 11, 2006 expressed an
unqualified opinion on those financial statements.
/s/ Goldstein Golub Kessler LLP
- --------------------------------
Goldstein Golub Kessler LLP
New York, New York
May 11, 2006
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management, including our Chief Executive
Officer and Chief Financial Officer, has conducted an evaluation
of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-14(c)
promulgated under the Securities Exchange Act of 1934, as
amended) as of the year ended March 31, 2006, the end of the
period covered by this report (the "Evaluation Date"). Based
upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and
procedures are effective for timely gathering, analyzing and
disclosing the information we are required to disclose in our
reports filed under the Securities Exchange Act of 1934, as
amended. There have been no significant changes made in our
internal controls or in other factors that could significantly
affect our internal controls over financial reporting during the
period covered by this report.
ITEM 9B. OTHER INFORMATION
Not applicable.
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be set forth in our
Proxy Statement relating to our 2006 Annual Meeting of
Stockholders to be held on July 28, 2006, and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in our
Proxy Statement relating to our 2006 Annual Meeting of
Stockholders to be held on July 28, 2006, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this item (other than information
required by Item 201(d) of Regulation S-K with respect to equity
compensation plans, which is set forth below in this Annual
Report on Form 10-K) will be set forth in our Proxy Statement
relating to our 2006 Annual Meeting of Stockholders to be held on
July 28, 2006, and is incorporated herein by reference.
Securities Authorized for Issuance under Equity Compensation
Plans
The following table sets forth securities authorized for
issuance under equity compensation plans, including individual
compensation arrangements, by us under our 1998 Stock Option Plan
and any compensation plans not previously approved by our Board
of Directors as of March 31, 2006:
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 846,170 $7.32 810,068
Equity compensation plans not
approved by security holders (1) 5,000 $1.33 -
--------- ---------
Total 851,170 810,068
========= =========
(1) Represents non-plan options to purchase an aggregate
of 5,000 common stock options issued to a member of our
management, prior to 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be set forth in our
Proxy Statement relating to our 2006 Annual Meeting of
Stockholders to be held on July 28, 2006, and is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be set forth in our
Proxy Statement relating to our 2006 Annual Meeting of
Stockholders to be held on July 28, 2006, and is incorporated
herein by reference.
41
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report on Form 10-K.
(1) Consolidated Financial Statements
The following exhibits are filed as part of this report on Form 10-K.
(3) Articles of Incorporation and By-Laws
3.1 Amended and Restated Articles of Incorporation (1)
3.2 By-Laws of the Corporation (1)
(4) Instruments Defining the Rights of Security Holders
4.1 Form of Warrant issued to Noble International Investments, Inc. (1)
4.2 Specimen common stock certificate (1)
(10) Material Contracts (*Management contract or compensatory
plan or arrangement.)
10.1 Second Amended and Restated Employment Agreement with
Marc A. Puleo (incorporated by reference to Exhibit 10.1
of the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 2000, Commission File No. 000-28827).*
10.2 1998 Stock Option Plan (1)*
10.3 Line of Credit Agreement with SouthTrust Bank, N.A. (1)
10.4 Employment Agreement with Menderes Akdag (incorporated by
reference to Exhibit 10 of the Registrant's Form 8-K on
March 16, 2001, Commission File No. 000-28827).*
10.5 Agreement for the Sale and Leaseback of the Land and
Building (incorporated by reference to Exhibit 99.1 of
the Registrant's Form 8-K on June 14, 2001, Commission
File No. 000-28827).
10.6 Line of Credit Renewal Agreement with SouthTrust Bank, N.A. (1).
10.7 Loan Agreement with SouthTrust Bank, N.A. (1).
10.8 Second Line of Credit ($1,000,000) Agreement with
SouthTrust Bank, N.A. (1).
10.9 Third Line of Credit ($2,000,000) Agreement with
SouthTrust Bank, N.A. (1).
10.10 Amendment to Third Line of Credit ($5,000,000) Agreement
with SouthTrust Bank, N.A. (incorporated by reference to
Exhibit 10.10 of the Registrant's Form 10-Q on November
7, 2003, Commission File No. 000-28827).
10.11 Amendment Number 1 to Executive Employment Agreement with
Menderes Akdag (incorporated by reference to Exhibit 99.1
of the Registrant's Form 8-K on March 16, 2004,
Commission File No. 000-28827).*
10.12 Line of Credit ($6,000,000) Agreement with RBC Centura Bank.
(incorporated by reference to Exhibit 10.12 of the Registrant's
Form 10-Q on November 5, 2005, Commission File No. 000-28827).
10.13 Termination of Marc Puleo's Executive Employment Agreement
(incorporated by reference to Exhibit 10.13 of the Registrant's
Form 8-K on August 1, 2005, Commission File No. 000-28827).*
42
(14) Corporate Code of Ethics
14.1 Corporate Code of Ethics (incorporated by reference in
our definitive Proxy Statement for our 2004 Annual
Meeting of Stockholders held on August 6, 2004).
(21) Subsidiaries of Registrant
21.1 Subsidiaries of Registrant (filed herewith).
(31) Certifications
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, promulgated
under the Securities Exchange Act of 1934, as amended (filed
herewith to Exhibit 31.1 of the Registrant's Report on
Form 10-K for the year ended March 31, 2006, 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, 2006, 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, 2006, Commission File No. 000-28827).
(1) Incorporated by reference to the Registration Statement
on Form 10-SB, File No. 000-28827, as amended, as filed
with the Securities and Exchange Commission.
43
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: May 31, 2006
PETMED EXPRESS, INC.
(the "Registrant")
By:/s/ Menderes Akdag
-----------------------
Menderes Akdag
Chief Executive Officer
and President
(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 May 31, 2006.
SIGNATURE TITLE
/s/ Menderes Akdag Chief Executive Officer and President
- --------------------------- (principal executive officer)
Menderes Akdag Officer and Director
/s/ Marc Puleo, M.D. Chairman of the Board
- --------------------------- Director
Marc Puleo, M.D.
/s/ Bruce S. Rosenbloom Chief Financial Officer and Treasurer
- --------------------------- (principal financial and accounting officer)
Bruce S. Rosenbloom Officer
/s/ Robert C. Schweitzer Director
- ---------------------------
Robert C. Schweitzer
/s/ Ronald J. Korn Director
- ---------------------------
Ronald J. Korn
/s/ Gian Fulgoni Director
- ---------------------------
Gian Fulgoni
/s/ Frank J. Formica Director
- ---------------------------
Frank J. Formica
44