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Filed pursuant to Rule 424(b)(3)
Registration No. 333-38872
PROSPECTUS SUPPLEMENT
TO
PROSPECTUS DATED JULY 10, 2000
13,693,733 SHARES
PET QUARTERS, INC.
COMMON STOCK
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The following information supplements the information contained in the
Prospectus and the first Supplement to the Prospectus dated July 10, 2000 and
September 5, 2000, respectively. You should read this prospectus supplement and
all previous prospectuses carefully before you invest. These documents contain
information you should consider when making your investment decision. When used
herein, the term "Prospectus" refers to the Prospectus dated July 10, 2000, and
all supplements to the Prospectus.
On November 29, 2000, we sold 850,000 shares of our common stock to
Splendid Rock Holdings, Ltd. for a price of $.43 per share pursuant to the
equity line of credit agreement between us. These purchases resulted in
aggregate proceeds of approximately $365,500. Ladenburg Thalmann & Co., Inc.
received $21,930 as a placement fee in connection with this drawdown. In
addition, we are required to pay certain other fees and expenses in connection
with the sale.
This prospectus relates to the issuance by Pet Quarters, Inc. of up to
4,242,349 shares of common stock of Pet Quarters, Inc., and the resale of up to
9,451,384 shares of common stock, from time to time, by the selling
stockholders listed on page 33 of this prospectus. Of the 13,693,733 shares of
common stock offered hereby:
o 2,758,112 shares may be issued to persons who hold Pet Quarters Series
A Convertible Preferred Stock, upon conversion of the preferred stock into
common stock;
o 1,484,237 shares may be issued to persons upon the exercise of warrants
to purchase common stock;
o 3,727,586 shares may be offered and sold by certain persons who
currently own Pet Quarters common stock;
o 723,798 shares may be offered and sold by AMRO International, S.A.,
which may be issued upon conversion of a 6% Convertible Debenture currently
held by AMRO; and
o 5,000,000 shares may be offered and sold by Splendid Rock Holdings,
Ltd., which will receive common stock pursuant to our equity line of credit
agreement with Splendid Rock Holdings.`
We expect to use the proceeds from this sale of common stock under the
equity line of credit to be used and for general corporate purposes. We will
not receive any of the proceeds from the sale of shares by Splendid Rock
Holdings, Ltd.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS NOVEMBER 28, 2000
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR ACCURATE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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You should rely only on the information contained in this prospectus.
We have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not making an offer to sell these securities
in any jurisdiction where the offer or sale is not permitted. You should assume
that the information appearing in this prospectus is accurate as of the date on
the front cover of this prospectus only. Our business, financial condition,
results of operation, and prospects may have changed since that date.
PROSPECTUS DELIVERY REQUIREMENT
All underwriters that effect transactions in these securities, whether
participating in this offering, may be required to deliver a prospectus to
purchasers of these securities.
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TABLE OF CONTENTS
Page No.
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RECENT DEVELOPMENTS....................................................S-4
RISK FACTOR............................................................S-6
PRICE RANGE OF COMMON STOCK............................................S-6
CAPITALIZATION.........................................................S-6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................S-7
EXECUTIVE COMPENSATION................................................S-12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................................S-14
ADDITIONAL INFORMATION................................................S-16
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RECENT DEVELOPMENTS
On May 8, 2000, we issued 34,642 shares of our Series A Convertible
Preferred Stock for total consideration of $3,464,200, consisting of $2,055,700
in cash and $1,408,500 worth of interests in the Bridge Loan. The acquisition
of these Bridge Loan interests effectively retired an equivalent amount of
principal on the Bridge Loan. In addition, on May 5, 2000, we borrowed
$1,000,000 from AMRO International, S.A., pursuant to the terms of a 6%
Convertible Debenture. The debenture required us to make quarterly interest
payments, beginning August 5, 2000, and the full amount of the loan was due and
payable on November 5, 2000. The debenture is convertible, at the option of
AMRO, into shares of Pet Quarters common stock at a price of $1.50 per share or
85% of the average price of the lowest three days during the last twenty-two
days prior to the notice of conversion, with a minimum principal amount of
$50,000 converted. The proceeds from the debenture and the sale of the
preferred stock were used to retire the Bridge Loan. On November 3, 2000, the
due date for payment in full of the debenture was extended for six months until
May 5, 2000. In connection with this extension, the conversion price for the
debenture was reduced to $1.00 per share, and the exercise prices for the two
groups of warrants owned by AMRO International, S.A. were reduced. The exercise
price of the warrants to purchase 130,000 shares was reduced from $4.6575 to
$1.00. These warrants expire on February 23, 2004. The exercise price of the
warrants to purchase 54,237 shares was reduced from $2.03 to $1.00. These
warrants expire on June 1, 2003.
We currently provide pet products on a wholesale basis to pet
professionals, including proprietors of boarding facilities, managers and staff
of animal shelters and humane societies, as well as veterinarians, groomers,
breeders, and show exhibitors. These sales predominately occur through our
Dog's Outfitter(R) catalog. We have developed a related web site located at
www.dogsoutfitter.com to service the needs of the pet professional community
which went on-line in August, 2000. We intend to include at this web site an
information clearing house where pet professionals can share knowledge and
experiences as well as build a network of references. The relationships we
develop with veterinarians and other pet professionals should provide us with
valuable referral opportunities to the pet consumer.
On September 7, 2000, we created the Pet Quarters, Inc. Employee
Equity Participation Incentive Plan (the "Plan"). We have reserved 2,000,000
shares for issuance to officers, directors, employees, consultants and advisors
("Eligible Person") under the terms of the Plan. Pursuant to the terms of the
Plan, the Board may issue Options, Stock Appreciation Rights, Restricted Stock
Awards, or Performance Share Awards to any Eligible Person. If an Option is
granted, the Board must specify if it is a non-qualified stock option ("NQSO")
or an Incentive Stock Option ("ISO"). ISOs may only be granted to employees and
must be for fair market value on the issued date. NQSO's may be issued for 85%
of the fair market value of the shares on the issued date of the Option. All
Options must expire no later than ten years after the date of issue. An award
of a Stock Appreciation Right entitles the holder to receive payment of an
amount equal to the difference between the fair market value of the shares on
the issue date and the fair market value of the shares on the exercise date of
such Stock Appreciation Right. Restricted Stock Awards may be issued for 85% of
fair market value of the shares on the issue date of the award and may be
paid for in cash or by note. If payment is made by note, the shares purchased
shall not be delivered until the note is paid in full. The Board may grant any
Eligible Person Performance Shares Awards, which will entitle the grantee to a
specified number of shares or cash upon the achievement of certain goals
established by the Board of the Company. We believe that the Plan will promote
our success by providing compensatory equity incentives in order to attract,
motivate and retain employees.
On October 19, 2000, we contracted with Aries Equity Corp. to advise
and assist us in raising capital. Upon its execution of this contract, Aries
Equity Corp. received warrants to purchase 50,000 shares of stock at a price of
$0.65 per share. The contract also provides for the future payment of a 5% cash
commission and the issuance of warrants to purchase up to 67,500 shares at a
price of $0.65 per share to Aries Equity Corp. upon the satisfaction of certain
conditions related to funds raised and stock price.
On November 22, 2000, we obtained a loan in the amount of $200,000,
which will mature on November 15, 2001, and is secured with a first lien
against our facility in Lonoke, Arkansas. The loan accrues interest at a rate
of 10% per annum and may be extended for an additional year to November 15,
2002, if quarterly interest payments are made on a timely basis. Currently, the
Lonoke, Arkansas facility is listed for sale for $650,000. Existing loans in an
aggregate amount of $329,939 have a junior position against this facility.
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On November 24, 2000, we closed a loan for $500,000 with a financial
institution. The loan is secured by an existing lien against the stock of PQ
Acquisition Corp., Inc., formerly Humboldt & Maplewood Industries. The loan
accrues at a rate of 10.5% and matures on January 15, 2001. The total combined
indebtedness with this institution is $1,450,000, which includes the $500,000
loan and an existing $950,000 line of credit. The $950,000 loan matures on
January 10, 2001 and is also secured by the PQ Acquisition stock.
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RISK FACTOR
The Company is very dependent on the continued services of its chief
executive officer, president, chief financial officer and executive vice
president. Our Company cannot currently maintain key person life insurance on
these individuals. The loss of the services of one or more of these individuals
would have a significant adverse impact on the Company's long-term planning,
financing and operations. We believe that each of these officers is currently
in good health, but until our operating income improves, the Company is not
able to insure against the loss of one or more of these employees.
PRICE RANGE OF COMMON STOCK
Since May, 1998, our common stock has traded on the over-the-counter
bulletin board under the symbol PDEN. Below are the quarterly high and low
closing prices since inception as recorded by the bulletin board. Bid prices
were not available.
PERIOD LOW HIGH
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July - September 1998 11/32 1-11/100
October - December 1998 6/25 2
January - March 1999 9/16 1-13/16
April - June 1999 7/8 4-19/32
July - September 1999 2-15/16 6-9/16
October - December 1999 1 3-11/32
January - March 2000 2-21/32 5-19/32
April-June 2000 3-27/32 1-7/32
June-September 2000 .78 1.26
As of September 9, 2000, the Company had 1,499 shareholders of record.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000
on an actual basis and as of September 30, 2000 on an actual basis and on a pro
forma basis to reflect $700,000 in new loans and the issuance of $850,000
shares of common stock pursuant to the equity line of credit.
SEPTEMBER 30,
JUNE 30, SEPTEMBER 30, 2000
2000 2000 PRO FORMA
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Notes Payable, Capital Leases and
Convertible Debenture .................. $ 1,951,877 $ 2,240,178 $ 3,150,178
Stockholders Equity:
Convertible Preferred Stock: $0.001
par value 10,000,000 authorized,
34,642 issued and outstanding .......... 35 35 35
Common stock: $0.001 par value
40,000,000 authorized, 19,857,648
outstanding ............................ $ 18,148 $ 19,858 $ 20,708
Additional Paid-in-Capital ............. $ 33,109,661 $ 34,423,950 $ 34,788,600
Accumulated Deficit .................... $(16,586,531) $(19,763,257) $(19,763,257)
Unamortized Stock Compensation ......... $ (96,855) $ (15,797) $ (15,797)
Total Stockholders' Equity ........ $ 16,444,458 $ 14,664,789 $ 15,030,289
Total Capitalization .............. $ 18,396,335 $ 16,904,967 $ 18,180,467
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SUMMARY FINANCIAL DATA
FISCAL YEAR ENDED THREE MONTHS ENDED
JUNE 30 SEPTEMBER 30
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2000 1999 2000 1999
------------ ------------ ---------- ----------
Net Sales ................................ $ 13,731,147 $ 262,470 3,973,334 2,510,752
Gross Margin ............................. 4,284,747 56,696 1,157,325 832,545
Total Operating Expenses: ................ 12,849,848 1,114,966 4,248,061 1,329,618
Operating Loss ........................... (8,565,101) (1,058,270) (3,090,736) (497,073)
Net Loss ................................. (11,318,087) (1,052,265) (3,176,726) (1,260,360)
Net Loss for Common Stockholders ......... (14,718,087) (1,052,265) (3,176,726) (1,260,360)
Basic and Diluted Net Loss Per Share ..... (1.18) (0.09) (.17) (.12)
Weighted Average Shares Outstanding
used to Compute Basic and Diluted Net
Loss for Common Stockholders per
Common Share ............................. 12,482,101 11,453,000 18,582,182 10,701,162
Total Assets ............................ 21,846,952 1,042,285 20,155,076 10,213,120
Notes Payable, Capital Leases and
Convertible Debenture ................... 1,951,877 325,000 2,240,178 325,000
Total Stockholders' Equity .............. 16,444,458 501,278 14,664,789 1,042,285
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains some forward-looking
statements which are based upon the plans, goals, and objectives of Pet
Quarters and its management. Such statements are subject to various risks and
uncertainties, including the inability to access financing. We have various
loans outstanding, which are due upon demand and could require additional
infusions of capital if one or more lenders called the loans for payment. Our
longer-term development plans also require additional capital for completion.
Consequently, the reader should consider that such uncertainties and risks may
cause actual results to vary materially from those stated plans, goals, and
objectives outlined below.
BALANCE SHEET DATA AS OF SEPTEMBER 30, 2000 COMPARED TO SEPTEMBER 30, 1999
Assets. The total assets as of September 30, 2000 were $20,155,076 as
compared to $21,846,952 as of June 30, 2000. This is an 8% decrease, which
reflects the goodwill that was amortized during the quarter. We had current
assets of $3,005,069 including cash of $211,439, inventories of $1,517,685,
prepaid expenses of $462,202 and land and building held for sale of $500,000 as
of September 30, 2000 as compared to current assets of $3,302,340 including
cash of $164,128, inventories of $1,674,002, prepaid expense of $637,425 and
building and land held for sale of $500,000 as of June 30, 2000. We have listed
the facility in Lonoke, Arkansas for $650,000. The purchase of Humboldt
Industries eliminated the original purpose of the facility, and the Company is
prepared to sell the Lonoke facility.
Goodwill, net of accumulated amortization, was $16,149,783 as of
September 30, 2000 as compared to $17,524,514 as of June 30, 2000. The
reduction in goodwill reflects the quarterly amortization of goodwill resulting
from the purchase of Humboldt Industries, WeRPets.com, Chartendure Ltd., and
AllPets.com. We are amortizing these acquisitions on schedules that vary
between two and five years.
Intangible assets in the amount of $513,662 as of September 30, 2000
include capitalized costs associated with our website as compared to $506,227
as of June 30, 2000. We anticipate website design and development costs will
continue and will be capitalized in conformity with Statement of Position (SOP
98-1).
Liabilities and Stockholders Equity.
Liabilities. Total liabilities of $5,490,287 are reflected as of
September 30, 2000 as compared to total liabilities as of $5,402,494 as of June
30, 2000.
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Current liabilities. Current liabilities include accounts payable of
$2,537,801 as of September 30, 2000 as compared to $2,904,205 as of June 30,
2000. Accrued expenses of $712,308 as of September 30, 2000 compared with
$546,412 as of June 30, 2000. We had notes payable totaling $2,240,178 for the
quarter ended September 30, 2000 including notes payable to related parties and
a $1,000,000 debenture which has been extended to May 5, 2001. This compares to
$1,951,877 in notes and capital leases payable as of June 30, 2000. Related
party notes in the amount of $329,989 are secured with the facility in Lonoke,
Arkansas.
Stockholders Equity. Common shares increased from 18,147,783 as of
June 30, 2000 to 19,857,648 as of September 30, 2000. Most of the increase is
the result of the issuance of an additional 694,184 shares under the terms of a
prior stock issuance in February, 2000, the result of 750,000 shares issued
pursuant to a "put" arrangement and the release of 238,095 shares which were
held in escrow from a February, 2000 agreement. Both of these transactions have
been described in prior Company filings. Total shareholder equity was
$14,664,789 as compared to $16,444,458 as of June 30, 2000. Total liabilities
and stockholder's equity was $20,155,076 on September 30, 2000 as compared to
$21,846,952 on June 30, 2000.
During the quarter, the Company received funds from a draw on the bank
letter of credit in the amount of $700,000, a release of funds from escrow in
the amount of $500,000, and funds from the issuance of the put in the amount of
$600,000. The Company continues to seek additional capital to meet its short
term capital needs. We expect the ongoing capital needs of the Company to be
met through the equity line of credit.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1999
Sales. Sales increased to $3,973, 334 for the quarter ended September
30, 2000 from $2,510,752 for the quarter ended September 30, 1999. This is a
58% increase. This resulted from the fact that the quarter ended in 1999
included two months of sales from the purchase of Humboldt Industries, and the
internet sales for the September 2000 quarter was $307,625 as compared to
$70,655 for the September 1999 quarter.
Cost of Sales. Cost of sales increased from $2,816,009 as of September
30, 2000 as compared to $1,678,207 as of September 30, 1999. This is a 68%
increase and is the result of the increase in sales described above and our
free shipping policy on orders placed online.
Gross Margin. Our gross margins declined to 29% for the quarter ended
September 30, 2000 as compared to 33% for the same period in 1999. The lower
margins are a direct result of increasing online sales. We believe gross
margins will be stable throughout the year.
Selling Expenses. Selling expenses of $848,354 for the quarter ended
September 30, 2000 compare with $375,449 for the quarter ended September 30,
1999. The majority of the selling expenses were attributed to the cost of the
catalogs.
Administrative and general expenses increased to $1,969,431 during the
quarter ended September 30, 2000 as compared to $642,206 for the quarter ended
September 30, 1999. This increase can be partially attributed to the purchases
of Humboldt Industries, WeRPets.com, Chartendure Ltd., and AllPets.com.
Additionally, amortization from stock and option grants and expenses from
day-to-day operations of our business are included in the total.
Recently, we have reduced payroll expenses and believe other
reductions will occur during the remainder of the fiscal year.
Depreciation and amortization expenses for the quarter were $1,430,276
as compared to $311,963 in the quarter ended September 30, 2000. These items
include amortizations of Humboldt Industries, WeRPets.com, Chartendure, Ltd.,
and AllPets.com. The amortizations are expected to continue for two to four
more years.
Interest expense was $91,174 for the quarter ended September 30, 2000
as compared to $111,616 for the same period in 1999. Interest expense was
reduced after the Sun Valley Trust note was retired in May 2000.
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Income Tax Benefit. We currently have substantial net operating losses
(NOL'S) from inception through September 30, 2000. At this time, no income tax
benefit has been recognized.
Net Loss. We had a $3,176,726 loss for the quarter as compared to
$1,260,360 loss for the quarter ended September 30, 1999. Non-cash items
include the goodwill amortization of Humboldt Industries, WeRPets.com,
Chartendure Ltd., and AllPets.com, depreciation expense, and stock compensation
expense.
Recent Events. Several of our online competitors have announced they
are ending operations. Management believes the online customers of these
companies will search for an alternate provider of online pet supplies and
accessories. We are actively pursuing these new customers, however there is no
assurance that we will be successful in these efforts.
BALANCE SHEET DATA AS OF JUNE 30, 2000 COMPARED TO JUNE 30, 1999
Assets. The total assets as of June 30, 2000 were $21,846,952 as
compared to $1,042,285 as of June 30, 1999. Assets attributed to the Internet
segment were $13,697,272 and $8,149,680 to catalog operations. Most of the
increase resulted from the purchase of Humboldt Industries in August 1999. We
had current assets of $3,302,340 including cash of $164,128 and inventories of
$1,674,002 as of June 30, 2000 as compared to current assets of $76,413
including cash of $37,726 and inventories of $33,783 as of June 30, 1999. The
Company is pursuing the sale of the Arkansas facility. These assets are
reflected as Land and Building held for sale in the amount of $500,000. The
Company recorded an expected loss on sale of $400,000 during the quarter ended
March 31, 2000.
Long-term fixed assets include land, building and improvements, and
furniture and fixtures. The items total $513,871 net of accumulated
depreciation as of June 30, 2000 as compared to $935,487 net of accumulated
depreciation as of June 30, 1999. On April 14, 2000 we accepted an offer to
sell the facility in Lonoke, Arkansas for $560,000 before expenses and
commissions. The offer expired on September 1, 2000. The Company is pursuing
other options concerning the sale of the facility and the Company expects to
sell these assets at their current book value. The purchase of Humboldt
Industries has eliminated the original purpose of the facility and we believe
it is in the best interest of shareholders to increase our cash reserve or
eliminate or reduce debt outstanding with a sale.
Goodwill, net of accumulated amortization, was $17,524,514 as of June
30, 2000. The goodwill results from the purchases of Humboldt Industries,
WeRPets.com, Chartendure Ltd., and AllPets.com, Inc. Currently, we are
amortizing the purchases on a five-year, three-year, two-year, and three-year
schedules, respectively. There was no corresponding entry from the prior
period.
Intangible assets in the amount of $506,227 include capitalized costs
associated with our web site. We anticipate web site design and development
costs will continue and will be capitalized in conformity with generally
accepted accounting principles and Statement of Position (SOP) 98-1.
Liabilities. Liabilities totaled $5,402,494 as of June 30, 2000. Total
liabilities as of June 30, 1999 were $541,007. Current liabilities include
accounts payable of $2,904,205 as of June 30, 2000 as compared to $203,394 as
of June 30, 1999. Our accrued expenses increased to $546,412 as of June 30,
2000 from $12,613 at June 30, 1999. The increases are primarily the result of
the acquisitions during the past fiscal year.
During the year, we borrowed $4,600,000 from the Sun Valley Trust. The
principal balance increased to $4,830,000 in November 1999. The principal was
reduced in February 2000 by $1,000,000 payment and the $3,830,000 remaining
balance of the obligation to the Sun Valley Trust was due in full on May 10,
2000. On May 9, 2000 the remaining balance to the Sun Valley Trust was retired
by the payment of $2,421,500 and the conversion of the remaining balance to
convertible preferred stock.
At June 30, 2000, the Company had related party debt in the amount of
$615,178, capital leases in the amount of $296,699 and other unsecured debt in
the amount of $90,000. Additionally, after the end of the fiscal year ended
June 30, 2000 the Company secured a line of credit in the amount of $950,000.
This line of credit is secured with the assets of PQ Acquisition common stock,
which holds the assets of Humboldt Industries. A portion of this line of credit
has been used to retire the capital leases in the Pennsylvania facility.
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The current portion of capital leases and notes payable in the amount
of $260,936, a portion of which is secured by telephone hardware and computer
equipment in the Pennsylvania facility. After the end of the fiscal year ended
June 30, 2000 these capital leases were paid off in full.
On May 5, 2000 the Company borrowed $1,000,000 from AMRO International
through a convertible debenture. The debenture carries an interest rate of 6%.
The debenture can be converted into Pet Quarters, Inc. common stock at the
option of AMRO International. The proceeds of the debenture were used in the
payoff of the Sun Valley Trust note. The debenture matures on November 5, 2000.
Stockholders Equity. Common shares increased from 9,800,195 as of June
30, 1999 to 18,147,783 as of June 30, 2000. The increase in shares outstanding
reflects the issuance to investors of private placements offered by Pet
Quarters, Inc., the issuance of shares to purchase Humboldt Industries,
WeRPets.com, Chartendure Ltd., AllPets.com, and the granting of shares to Pet
Quarters, Inc. officers and employees. Additionally, we raised $3,464,200
through the issuance of preferred shares in May 2000. The preferred shares
carry an interest rate of 0% and are convertible into Pet Quarters, Inc. common
shares at $1.3816. Additional Paid In Capital increased from $2,498,867 as of
June 30, 1999 to $33,109,661 as of June 30, 2000. The acquisitions of Humboldt
Industries, WeRPets.com, Chartendure Ltd., and AllPets.com produced the largest
part of the increase from 1999 to 2000. Retained deficit increased to
$16,586,531 in June 30, 2000 from $1,868,444 on June 30, 1999. Total
stockholders equity as of June 30, 2000 was $16,444,458 as compared to $501,278
as of June 30, 1999.
Total liabilities and stockholders equity was $21,846,952 and
$1,042,285 as of June 30, 2000 and June 30, 1999 respectively.
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED JUNE 30, 2000
COMPARED WITH THE TWELVE MONTHS ENDED JUNE 30, 1999
Sales. Sales for the twelve months ended June 30, 2000 were
$13,731,147 as compared to $262,470 for the twelve months ended June 30, 1999
primarily as a result of the acquisition of Humboldt Industries. Catalog sales
for fiscal 2000 were $13,080,388 and $650,759 were Internet sales. The sales
for 2000 include catalog sales of Humboldt Industries for eleven months and Pet
Quarters, Inc. for twelve months. All sales in the period ended June 30, 1999
were Internet sales.
Operating Expenses. Cost of sales was $9,446,400 for the twelve months
ended June 30, 2000 as compared to $205,774 for the same period in 1999, which
was 69% percent of sales in 2000 and 78% percent in 1999. Selling expenses
increased to $2,184,748 for the period ending in 2000 as compared to $489,272
during the same period in 1999. The increase was primarily the result of
catalog costs resulting from the acquisition of Humboldt Industries on August
1, 1999. General and administrative expenses were $8,545,016 during the twelve
months ended June 30, 2000 as compared to $588,870 during the same period in
1999. The increase is attributed to the purchases of Humboldt Industries,
WeRPets.com, Chartendure Ltd., AllPets.com and the expense associated with the
acquisition Wellstone Acquisition Corporation that totaled $782,453. In March
2000, we recorded a write-down of the land and building in Lonoke, Arkansas in
the amount of $400,000. We intend to sell the warehouse and office space in
Lonoke, Arkansas, and the write-down was based on the difference between the
book value of the property and the cash value management believes the Company
will receive after a sale. Depreciation and amortization increased to
$2,120,084 in 2000 from $36,824 in 1999. This increase includes the
amortization of goodwill related to the purchases of Humboldt Industries,
WeRPets.com, Chartendure Ltd., and AllPets.com.
Interest Expense. Interest expense increase to $770,866 for the twelve
months ended June 30, 2000 as compared to $290 for the same period in 1999. The
increase is entirely related to the Bridge Loan for the purchase of Humboldt
Industries through the Sun Valley Trust (Bridge Loan), the convertible
debenture and other debt issued for working capital purposes. The Bridge Loan
was retired in full on May 9, 2000.
Other Expenses. Pet Quarters incurred other expenses associated with
the Bridge Loan during the twelve month period ended June 30, 2000, including
loan origination fees in the amount of $651,671 and troubled debt restructuring
expense in the amount of $1,339,461. There were no corresponding expenses in
1999.
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Net Loss. Net Loss for the twelve months ended June 30, 2000 was
$11,318,087 as compared to a loss of $1,052,265 for the same period in 1999.
The loss from operations totaled $8,565,101 in 2000 (which included $6,676,943
from the Internet and $1,888,158 from the catalog) compared to a loss from
operations of $1,058,270 in 1999, all in Internet. The loss for the twelve
months ended June 30, 2000 was impacted by non-cash items including
amortization of the goodwill on the acquisitions of Humboldt Industries,
WeRPets.com, Chartendure Ltd., AllPets.com, expense for stock awards and
options granted, the expense of the common stock issued for the Bridge Loan
extension, the beneficial conversion feature associated with the convertible
notes issued in November 1999 and the convertible preferred stock issued in
May, the purchase of Wellstone Acquisition Corporation and the write-down of
the facility in Arkansas.
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JUNE 30, 1999
COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1998
General. The period ending June 30, 1998 contains all of the costs
associated with a start up Internet company for a full year; however, Pet
Quarters was a fully operating entity for approximately the last two months of
that fiscal year. The primary reason is that the Pet Quarters web site was not
fully operational until May 1998.
Sales. Sales for the year ended June 30, 1999 were $262,470 compared
to $43,835 in fiscal 1998. The Company's believes that the Christmas season
will typically provide revenues that are significantly higher in the December
quarter than at other times of the year. The Company experienced a large
increase in order flow during the Christmas season of 1998 in comparison to the
other quarters during the year.
Operating Expenses. Cost of sales was $205,774 for 1999 and $21,908
for 1998. The Company operated on a 22% margin in fiscal year 1999. This
compares to 50% for 1998. The selling expenses were $196,497 in 1998 and
$489,272 in 1999 and primarily consisted of both web-based and traditional
publications, with web sites and advertisers making up the bulk of the selling
expenses. The increase for fiscal year 1999 from fiscal year 1998 reflected
increased operating activity in 1999 versus 1998. General and administrative
expenses for fiscal 1998 were $647,114 and $588,870 in 1999. The expenses
included salaries, general expenses, professional fees for legal and
accounting, travel, web site maintenance and other miscellaneous expenses. The
slightly higher amount recorded in 1998 is primarily due to the one-time start
up cost of the business. During fiscal year 1998, the Company recorded
depreciation and amortization on office equipment, computer and telephone
equipment, warehouse equipment, and the Lonoke, Arkansas facility. Similar
items were depreciated in fiscal year 1999. The largest depreciable asset of
Pet Quarters during both years is the facility in Lonoke, Arkansas. The
building is being depreciated on a forty-year life.
Net Loss for Common Stockholders. The loss in fiscal year 1998 of
$816,179 increased to a loss in fiscal year 1999 of $1,052,265, resulting
largely from the increase in selling expenses.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had $164,128 in cash and cash equivalents. Since
our inception, we have financed our operating cash flow needs primarily through
private offering of equity securities and debt. Cash utilized in operating
activities was $2,808,398 for the twelve months ended June 30, 2000 and
$649,731 for the year ended June 30, 1999.
Net cash utilized in investing activities was $4,245,692 for the
twelve months ended June 30, 2000 and $11,386 for the year ended June 30, 1999.
The use of cash for investing activities was primarily attributed to the
purchase of Humboldt Industries, the purchase and development of the web site,
and purchases of equipment.
Net cash provided by financing activities was $7,180,492 for the
twelve months ended June 30, 2000. During the twelve months, we raised
$2,642,605 from the issuance of common stock. Net cash provided by financing
activities was $323,000 for the year ended June 30, 1999, which was primarily
attributed to borrowings. In May 2000 we raised $2,055,300 in cash through the
issuance of 34,642 shares of our Series A Convertible Preferred Stock.
Additionally, $1,408,500 of principal was converted from the Bridge Loan into
the Series A Convertible Preferred Stock.
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In August 1999, we borrowed $4,600,000 from the Sun Valley Trust and
issued 153,334 shares of our common stock to the Trust as an origination fee
for such loan, which related to the acquisition of Humboldt Industries. Much of
the cash provided from financing activities was used to repay the Bridge Loan,
which was fully retired in May, 2000. The remaining cash from financing
activities was used for working capital purposes.
We expect negative cash flow from operations to continue until
revenues are increased. We believe an increase in revenues will be accomplished
through increased traffic to our web site and through an increase in catalog
sales.
We currently expect that the net proceeds from the equity line of
credit, together with our available funds will be sufficient to meet our
anticipated needs for working capital and capital expenditures through the next
two years, however there can be no guaranties that this will occur. We may need
to raise additional funds prior to the expiration of such period if, for
example, we pursue business or technology acquisitions or experience operating
losses that exceed our expectations. If we raise additional funds through the
issuance of equity or debt securities, such securities may have rights,
preferences, or privileges senior to the rights of our common stock, and our
stockholders may experience additional dilution. We cannot be certain that
additional financing, when required, will be available to us on acceptable
terms, or at all.
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by Pet Quarters
for services rendered by our Chief Executive Officer and our other highest paid
executive officers during the last year:
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
AWARDS
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL FISCAL COMPENSATION AWARD(S) OPTIONS/SARS
POSITION YEAR SALARY/BONUS($) ($) ($) (#)
----------------------- ------- --------------- ------------ ---------- ------------
Steven B. Dempsey,
Chairman and CEO 2000 100,000 0 0 350,000(1)
Gregg Rollins,
Chief Financial Officer 2000 92,000 0 0 350,000(1)
- ----------
(1) These shares were issued pursuant to Pet Quarters, Inc.'s Management
Incentive Plan. The Company has reserved 2,500,000 shares for issuance to
officers, directors, consultants and employees of the Company under this
Plan. The Company's Management Incentive Plan ("Plan") allows the Board to
make restricted stock grants to employees. The stock granted under the Plan
does not vest for one year. Options issued under the Plan may vest
immediately. Securities received pursuant to a grant under the plan are
restricted securities. The Plan will be referred for a vote of shareholders
within twelve months of adoption by the Board.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
NUMBER
OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
FISCAL OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION PRESENT VALUE
YEAR NAME ($) FISCAL YEAR ($/SH) DATE ($)
-------- ----------- --------------- ---------------- -------- ---------- -------------
2000 Gregg Rollins 350,000 50% $ 1.6875 06/01/05 $295,313
2000 Mike Kelly 200,000 $ 2.96875 12/23/04 $593,750
2000 Steve Dempsey 350,000 50% $ 1.6875 06/01/05 $295,313
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
NUMBER OF SHARES
BENEFICIALLY
NAME CLASS OF SECURITY OWNED PERCENTAGE OWNED
- ----------------------- ----------------- ---------------- ----------------
Ammonia Hold, Inc. (1) Common Stock 1,647,500 8%
10 Gunnebo Drive
Lonoke, AR 72086
Matthew J. Hoff (2) Common Stock 1,060,452 5%
10 Gunnebo Drive
Lonoke, AR 72086
Michael Parnell (3) Common Stock 1,207,170 6%
10 Gunnebo Drive
Lonoke, AR 72086
Steven Dempsey (4) Common Stock 1,090,156 5%
720 E. Front
Lonoke, AR 72086
Dino Moshova (5) Common Stock 692,328 3%
720 E. Front
Lonoke AR 72086
Gregg Rollins (6) Common Stock 532,078 3%
720 E. Front
Lonoke, AR 72086
Mike Kelly Common Stock 55,000 *
1 Maplewood Drive
Hazelton, PA 18201
Robert M. Brown III (7) Common Stock 502,392 3%
720 E. Front
Lonoke, AR 72086
J. Tod Fetherling Common Stock 36,166 *
720 E. Front
Lonoke, AR 72086
Jerrell W. Shelton Common Stock 49,232 *
720 E. Front
Lonoke, AR 72086
Niloo Howe (8) Common Stock 765,871 4%
720 E. Front
Lonoke, AR 72086
Frank Creer (9) Common Stock 0 *
720 E. Front
Lonoke, AR 72086
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NUMBER OF SHARES
BENEFICIALLY
NAME CLASS OF SECURITY OWNED PERCENTAGE OWNED
- ----------------------- ----------------- ---------------- ----------------
Zone Ventures, L.P. Common Stock 1,111,974 6%
Limited Partnership
400 Seaport Court
Suite 250
Redwood City, CA 94063
AMRO International (10) Common Stock 1,944,474 10%
c/o Westminster Securities
100 Park Ave., 28th Floor
New York, NY 10017
All officers and directors Common Stock 3,723,223 18.7
as a group
- ----------
* Less than 1%.
(1) The Board of Directors of Ammonia Hold, Inc., are Michael D.
Parnell, President and CEO; Dan N. Thompson, CFO; Robert S. Ligow,
Charles Nickle, and William Ketchum. Any transaction concerning Pet
Quarters, Inc., including the disposition or purchase of common stock,
requires board authorization, effected by a vote of the majority of
the directors.
(2) Includes 60,000 shares held for Mr. Hoff's minor children, which
he is custodian. The Matthew J. Hoff Trust was dissolved after fiscal
year 2000.
(3) Includes 637,179 shares directly owned by Mr. Parnell and 569,991
shares which may be acquired through the conversion of shares of
Series A Convertible Preferred Stock.
(4) Includes 915,156 shares directly owned by Mr. Dempsey and 175,000
shares subject to stock options.
(5) Includes 517,328 shares owned directly by Mr. Moshova and 175,000
shares subject to stock options.
(6) Includes 108,483 shares owned directly by Mr. Rollins, 5,500
shares held by Mr. Rollins' minor children, 400,000 shares subject to
stock options, and 18,095 shares which may be acquired through
conversion of shares of Series A Convertible Preferred Stock.
(7) Includes 573,350 shares subject to stock options and 72,379 shares
which may be acquired through the conversion of shares of Series A
Convertible Preferred Stock.
(8) Includes 510,162 shares owned directly by Ms. Howe and 255,709
shares subject to stock options.
(9) Mr. Creer is a Managing Director of Zone Ventures, L.P.
(10) Includes 723,798 shares which may be converted into common stock
from a 6% convertible debenture.
At this time, the company is not involved in or aware of any arrangements that
will result in a change of control of the Company.
TRANSFER AGENT
The Company has appointed Continental Stock Transfer & Trust Company
as the transfer agent and registrar of the Common Stock.
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ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
Registration Statement (of which this prospectus supplement is a part) under the
Securities Act of 1933, as amended, relating to the common stock we are
offering. This prospectus supplement does not contain all the information that
is in the Registration Statement. Portions of the Registration Statement have
been omitted as allowed by the rules and regulations of the Securities and
Exchange Commission. Statements in this prospectus supplement that summarize
documents are not necessarily complete, and in each case you should refer to the
copy of the document filed as an exhibit to the Registration Statement.
For further information regarding our company and our common stock,
please see the Registration Statement and its exhibits and schedules. The
company files annual, quarterly and current reports with the SEC. You may read
any reports or other information the company files free of charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661
and 7 World Trade Center, Thirteenth Floor, New York, New York 10048. Copies of
the Registration Statement may also be obtained from the public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
or by calling the Commission at 1-800-SEC-0330, at prescribed rates. In
addition, the Registration Statement and other public filings can be obtained
from the Commission's Web site at http://www.sec.gov.
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