UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from to
------- --------
Commission file number 000-28469
PET QUARTERS, INC.
(Exact name of small business issuer as specified in its charter)
Arkansas 62-169-8524
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
221 W. Second St., Suite 627, Little Rock, Arkansas 72201
(Address of principal executive offices)
(501) 707-0360
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ( ) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 26,395,244
Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X)
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The accompanying balance sheets of Pet Quarters, Inc. and Subsidiaries at
September 30, 2001 and June 30, 2001, and the statements of operations and cash
flows for the three months ended September 30, 2001 and 2000 have been prepared
by the Company's management and they do not include all information and notes to
the financial statements necessary for a complete presentation of the financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. In the opinion of management, all adjustments
considered necessary for a fair presentation of the results of operations and
financial position have been included and all such adjustments are of a normal
recurring nature. The financial statements should be read in conjunction with
the financial statements included in the Company's Form 10-KSB filed with the
Securities and Exchange Commission for the fiscal year ended June 30, 2001.
Operating results for the quarter ended September 30, 2001 are not necessarily
indicative of the results that can be expected for the fiscal year ending June
30, 2002.
PET QUARTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
SEPTEMBER 30 JUNE 30
2001 2001
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 0 $ 0
Accounts receivable 86,431 66,882
Inventories 1,060,620 1,061,059
Prepaid expense 420,865 5,000
Land and building held for sale 382,000 382,000
Other current assets 52,569 28,591
------------ ------------
Total current assets 2,002,485 1,543,532
------------ ------------
Property, plant and equipment:
Land -- --
Buildings and improvements 78,328 69,406
Furniture and equipment 639,855 644,134
------------ ------------
718,183 713,540
Less accumulated depreciation (229,089) (201,827)
------------ ------------
489,094 511,713
Goodwill, net of accumulated amortization and
Write-downs of $19,325,000 at June 30, 2001 0 0
Intangible assets, net of accumulated amortization 388,647 429,969
------------ ------------
Total assets $ 2,880,226 $ 2,485,214
============ ============
</Table>
See Notes to Condensed Consolidated Financial Statements
2
<Table>
<Caption>
SEPTEMBER 30 JUNE 30
2001 2001
------------ ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,364,608 $ 2,505,457
Accrued expenses 1,643,624 1,340,533
Notes payable to related parties 197,391 367,390
Short-term notes payable, current portion of long-term
notes and capital leases payable 2,742,358 1,618,248
------------ ------------
Total current liabilities 6,947,981 5,831,628
Long-term portion of notes payable 1,726,676 1,921,667
------------ ------------
Total liabilities 8,674,657 7,753,295
------------ ------------
Stockholders' equity:
Common stock, $.001 par value per share, 40,000,000 shares
authorized; 26,395,244 and 24,746,059 shares issued and
outstanding at September 30, 2001 and June 30, 2001 26,398 24,746
Convertible preferred stock, $.001 par value per share,
10,000,000 shares authorized; 30,315 and 30,565 shares
issued and outstanding at September 30, 2001 and
June 30, 2001 31 31
Additional paid-in capital 36,326,376 36,327,527
Accumulated deficit (42,147,236) (41,620,385)
------------ ------------
(5,794,431) (5,268,081)
Less unamortized stock compensation
------------- ------------
Total stockholders' equity (5,794,431) (5,268,081)
------------ ------------
Total liabilities and stockholders' equity $ 2,880,226 $ 2,485,214
============ ============
</Table>
See Notes to Condensed Consolidated Financial Statements
3
PET QUARTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED September 30,
2001 2000
------------ ------------
Sales $ 2,930,538 $ 3,973,334
Cost of sales 1,992,718 2,816,009
------------ ------------
937,820 1,157,325
------------ ------------
Operating expenses and costs:
Selling 142,313 848,354
Administrative and general 951,242 1,969,431
Depreciation and amortization 257,652 1,430,276
------------ ------------
1,351,207 4,248,061
------------ ------------
Loss from operations (413,387) (3,090,736)
------------ ------------
Other income (expense):
Interest expense (113,464) (91,174)
Interest income 5,184
------------ ------------
(113,464) (85,990)
------------ ------------
Loss before income tax benefit (526,851) (3,176,726)
Income tax benefit -- --
------------ ------------
Net loss $ (526,851) $ (3,176,726)
============ ============
Net loss per common share:
Basic $ (0.02) $ (0.17)
Diluted $ (0.02) $ (0.17)
Basic Shares 26,132,103 18,582,182
Diluted Shares 26,132,103 18,582,182
</Table>
See Notes to Condensed Consolidated Financial Statements
4
PET QUARTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED September 30
2001 2000
------------ ------------
OPERATING ACTIVITIES
Net (loss) $ (526,851) $ (3,176,726)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 66,742 44,670
Amortization of goodwill 676 1,374,731
Amortization of intangibles and debt
discount 442
Amortization of stock compensation 81,058
expense
Stock issued for services 266,000
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable (19,549) 12,450
Inventories 440 156,317
Prepaid expenses and other current assets (415,865) 152,427
Accounts payable (140,849) (411,404)
Accrued expenses 303,889 165,896
Other assets (23,978) --
------------ ------------
Net cash used in operating activities (754,903) (1,334,581)
INVESTING ACTIVITIES
Purchases of property, plant, and equipment (4,222) (1,409)
------------ ------------
Net cash used in investing activities (4,222) (1,409)
FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 1,100,000
Proceeds net of payments from notes payable 759,125 283,301
------------ ------------
Net cash provided by financing activities 759,125 1,383,301
------------ ------------
Net increase (decrease) in cash (47,311) 47,311
Cash at beginning of period 47,311 164,128
------------ ------------
Cash at end of period $ 0 $ 211,439
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 67,420 $ 20,999
</Table>
See Notes to Condensed Consolidated Financial Statements
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
Pet Quarters, Inc. (the "Company") was organized under the laws of the State of
Arkansas on May 22, 1997. The Company sells pet supplies to retail and wholesale
customers through catalogs and the Company's web sites. In August 1999, the
Company purchased Humboldt Industries whose primary business was catalog sales.
As a result of this acquisition, the Company altered its business approach and
combined a traditional catalog company with an online component. The intent is
to migrate the customer base of its catalogs to online purchasers and to
increase the base of its online customers through the distribution of its
catalogs.
THE COMPANY HAS SOLD COMMON STOCK IN OFFERINGS THAT WERE EXEMPT FROM
REGISTRATION WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC"). THE COMPANY'S
COMMON STOCK IS CURRENTLY TRADED ON THE OTC BULLETIN BOARD.
BASIS OF PRESENTATION
We have prepared the accompanying condensed consolidated financial statements in
accordance with generally accepted accounting principles for interim financial
statements and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, these financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The interim financial information is
unaudited, but reflects all adjustments consisting only of normal recurring
accruals which are, in our opinion, necessary for a fair presentation of the
results of operations for the interim periods. Our operating results for the
interim periods are not necessarily indicative of the results that may be
expected for us for the entire year because of seasonal and short-term
variations. For further information, you should refer to the consolidated
financial statements and related footnotes included in our Annual Report on Form
10-KSB for the year ended June 30, 2001.
CONSOLIDATION
The consolidated financial statements include the accounts of all wholly owned
subsidiaries, which include, PQ Acquisition Company, Inc. (the survivor of
Humboldt and Maplewood acquisitions).
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
GOING CONCERN UNCERTAINTY
The accompanying consolidated financial statements have been presented in
conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has a
significant working capital deficiency and has incurred operating losses since
its formation. Management believes that actions presently being taken will
provide for the Company to continue as a going concern. Such actions may include
but are not limited to a strategic partnership or acquisition that would provide
the Company with the necessary capital, or sale of certain assets. However,
there are no assurances that management will be able to secure additional equity
capital or complete any other strategic transactions that will permit the
Company to meet its current obligations. During the year ended June 30, 2001,
the equity line of credit did not provide significant liquidity to the Company
due to the decline in the Company's stock price and may not be used in the
future for additional financing. If the Company is unable to obtain additional
financing or equity capital, management may be required to reduce its
operations, curtail the development of additional
6
markets and customers, and sell or dispose of assets; all of which may have
material adverse effects on the Company's financial position and future results
of operations.
ADVERTISING COSTS
The Company expenses advertising costs, other than direct response advertising,
as they are incurred. The Company accounts for catalog costs in accordance with
Statement of Position 93-7, "Reporting on Advertising Costs" in connection with
the marketing of their direct response product catalogs. The costs to produce
mail catalogs are amortized over the period of benefit, which is less than one
year using the ratio of current period revenue to the total current and
estimated future period revenues.
IMPAIRMENT OF ASSETS
The Company accounts for any impairment of its long-lived assets using Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Under SFAS No. 121, impairment losses are recognized when information indicates
the carrying amount of long-lived assets, identifiable intangibles and goodwill
related to those assets will not be recovered through future operations or sale.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
NOTE 2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share ("EPS"):
<Table>
<Caption>
Three Months Ended
September 30,
2001 2000
-------------- ------------
Numerator:
Net loss and numerator for basic
and diluted loss per share $ (526,851) $ (3,176,726)
============== ============
Denominator:
Denominator for basic earning
per share -- weighted-average
shares 26,132,103 18,582,182
============== ============
Employee Stock Options -- --
Warrants -- --
Contingent Shares -- --
-------------- ------------
Denominator for diluted earnings
per share - adjusted weighted-
average shares and assumed
conversion 26,132,103 18,582,182
============== ============
Basic loss per share $ (0.02) $ (0.17)
============== ============
Diluted loss per share $ (0.02) $ (0.17)
============== ============
</Table>
7
The effect of all potential common shares is anti-dilutive in the calculation of
diluted loss per share and therefore has been excluded from the calculation.
NOTE 3. STOCK-BASED COMPENSATION
The Company's Board of Directors has given approval to the establishment of a
Management Incentive Plan (MIP) and an Employee Equity Participation Incentive
Plan (EEPIP). During the quarter ended September 30, 2001, the company issued
1,553,550 shares to employees and consultants including Officers and Directors.
For the three months ended September 30, 2001 and 2000 the Company recognized
stock compensation expense in the amount of $0 and $81,058 for stock grants made
to employees. The Company has exchanged common stock or common stock options for
a variety of services. The Company records the cost associated with these
transactions in accordance with FASB Statement 123 "Accounting for Stock Based
Compensation".
Note 4. Notes Payable
<Table>
<Caption>
September 30 June 30
2001 2001
------------ -----------
Short-term line-of-credit agreement with a bank at an interest rate of 9.5%.
This note payable is due on July 12, 2001 and is secured by the stock of PQ $1,312,071 $1,420,000
Acquisition Corporation.
Twelve notes payable to individuals issued pursuant to a master loan
agreement. The loans bear interest at a rate of 8.5%. Interest is due
quarterly and the loans mature December 1, 2002. The loans are collateralized 1,176,028 1,176,028
by a second lien on the stock of PQ Acquisition Corporation.
Note payable to an Corporation pursuant to a master loan agreement. The loan
bears interest at a rate of 8.5%. Weekly payments of $20,000 are due until
principal and interest is paid with final repayment on December 1, 2002. The 1,000,000 1,000,000
loan is collateralized by a second lien on the stock of PQ Acquisition
Corporation.
Note payable to a Corporation and bear interest at 8.25%. Weekly principal
payments of $50,000 are due until the note is paid in full. The loan is 900,000 -0-
collateralized by a third lien on the stock of PQ Acquisition Corporation.
Note payable to an individual with an interest rate of 9%. The note is due
in four weekly payments of $25,000, plus interest, with final maturity -0- 100,000
in July 2001.
Demand note to a Trust with an interest rate of 10%. The note is secured by a
second lien on the land and building located in Lonoke, Arkansas. 175,000 175,000
Unsecured demand note to an individual. The note bears interest at a rate of 8%. 21,600 21,600
Unsecured note payable to Pine Tree Management Corporation with variable
interest of prime minus 1% (7% at June 30, 2001), interest payable quarterly
beginning September 10, 1999 with $45,000 principal payment due September 15, 41,000 45,000
2000 and 2001.
Debt discount (806,665) (597,713)
----------- -----------
4,469,034 3,539,915
Less current portion 2,742,358 1,618,248
----------- -----------
1,726,676 1,921,667
=========== ===========
</Table>
8
Note 5. RELATED PARTY TRANSACTIONS
At September 30, 2001 the Company had $30,000 in a note payable to TS&B Inc., a
principal shareholder of the Company. The note is due on demand and carries an
interest rate of 8%. The note payable is unsecured. At September 30, 2001, the
Company had notes payable to a consultant and founder of the Company in the
amount of $138,489. The notes are due on demand with interest rates of 9.5% to
10%. The notes are secured by a second lien on the property located in Lonoke,
Arkansas. At September 30, 2001, a director of the Company was owed $239,000.
This debt was issued pursuant to the participating loan agreement and is
classified with the other participating debt holders for financial statement
disclosure purposes. At September 30, 2001, a director and consultant was owed
$14,900, which carries an interest rate of 9.5% and is due on demand, and an
Officer of the Company was owed $14,000, which carries an interest rate of 9.5%
and is due on demand.
NOTE 6. EQUITY LINE OF CREDIT AGREEMENT
On March 15, 2000, the Company entered into an equity line of credit agreement
with Splendid Rock Holdings, Ltd., whereby the Company may sell or "put", from
time to time, up to an aggregate of $25 million of common stock at a price equal
to 85% of the average market price of the common stock as defined by the Line of
Credit Agreement. The maximum dollar amount of shares that may be put is subject
to certain volume and timing restrictions.
Through September 30, 2001, the Company had registered 5,000,0000 shares under
this agreement and issued 2,904,659 of shares of common stock pursuant to this
agreement.
In conjunction with this agreement the Company issued to Splendid Rock Holdings,
Inc. warrants to purchase up to 1,320,000 shares of common stock at an average
exercise price of $3.84. As currently structured, the Company will account for
the value of the warrants issued ($1,774,000) as a cost of the issuance of
common stock and, accordingly, this is not expected to impact future results of
operations. The Company is reviewing the viability of the Line of Credit and
expects to terminate the agreement with Splendid Rock Holdings, Inc.
NOTE 7. GOODWILL IMPAIRMENT LOSS
The Company recognizes the excess of acquisition costs over the fair values of
net assets acquired in business combinations as goodwill. Goodwill associated
with acquisitions is being amortized on a straight-line basis over its estimated
life, 2 to 5 years currently. The Company periodically evaluates the existence
of goodwill impairment on the basis of whether the goodwill is fully recoverable
from the projected undiscounted net cash flows of the related business unit. The
amount of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds.
The Company recorded goodwill in the amount of approximately $19.5 million in
1999 and 2000 related to the acquisitions of Humboldt Industries, Inc.,
Chartendure Ltd., WeRPets.com and Allpets.com. On a quarterly basis the Company
has reviewed the recoverability of goodwill in accordance with FAS 121 in order
to identify any potential impairment that might require a revision to the
estimated useful life of the goodwill or indicate impairment. At the end of
fiscal 2001 ended June 30, 2001 the Company impaired all of its remaining
goodwill in accordance with FAS 121.
9
NOTE 8. OPERATING SEGMENTS
Prior to the purchase of Humboldt Industries effective August 1, 1999, the
Company operated in one segment - internet sales of pet supplies. Beginning
August 1, 1999, the Company began, through the purchase of Humboldt Industries,
a catalog segment. Information on the operating segments for the three months
ended September 30, 2001 and 2000 is as follows:
<Table>
<Caption>
THREE MONTHS ENDED
September 30,
2001 2000
------------ ------------
Net Sales:
Internet $ 362,483 $ 307,625
Catalog 2,568,056 3,665,709
------------ ------------
Total $ 2,930,539 $ 3,973,334
============ ============
Loss from operations:
Internet $ (202,855) $ (2,042,931)
Catalog (210,532) (1,047,805)
------------ ------------
Total $ (413,387) $ (3,090,736)
============ ============
</Table>
Although the Company sells the same product at the same price to retail
customers through the internet and catalog segments, the means of selling is
different with the internet segment having the potential for a much broader
distribution with far more customers than can be reached through the traditional
catalog distribution channel. Revenues by geographical location of customer is
not practical to determine.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis contains some forward-looking statements,
which are based upon our plans, goals, and objectives for Pet Quarters, Inc. and
its management. Such statements are subject to various risks and uncertainties.
The most significant risk involves the Company's ability to obtain sufficient
cash and capital resources to operate its businesses. We have demand loans which
could require additional infusions of capital in order to make required
principal and interest payments. Our longer-term development plans also require
additional capital for completion. Other risks and uncertainties include our
ability to attract and retain customers, our ability to effectively manage costs
and expenses, and general economic conditions. Consequently, the reader should
consider that such uncertainties and risks may cause actual results to vary
materially from the stated plans, goals, and objectives outlined below. Unless
otherwise indicated, this discussion covers the period beginning on July 1, 2001
and concluding on September 30, 2001.
BALANCE SHEET DATA AS OF SEPTEMBER 30, 2001 COMPARED TO JUNE 30, 2001
Assets: The total assets as of September 30, 2001 were $2,880,226 as compared to
$2,485,214 as of June 30, 2001. This increase is primarily from deferred
advertising, which increased to $413,865 as of September 30, 2001, from $0 at
June 30, 2001. Deferred advertising reflects the assumed shelf life of specific
catalog mailings for sales not yet realized. During the first
10
quarter of fiscal 2002 management determined that the direct response
advertising was recoverable as the catalog's average life is approximately
90-120 days; therefore, $413,865 was recorded as a prepaid expense and a
corresponding reduction in printing expense. We had current assets of $2,002,485
as of September 30, 2001 compared to current assets of $1,543,532 as of June 30,
2001. We sold the Lonoke, Arkansas facility on October 1, 2001 for $425,000. The
proceeds of approximately $382,000 after expenses were used to reduce debt
collateralized by the facility.
Intangible assets, net of accumulated amortization were $388,647 as of September
30, 2001 as compared to $429,969 as of June 30, 2001. Intangible assets include
capitalized costs associated with our website. These costs have been capitalized
in accordance with SOP 98-1.
Liabilities and stockholders equity:
Liabilities: Total liabilities of $8,675,455 are reflected as of September 30,
2001 as compared to $7,753,295 as of June 30, 2001.
Current liabilities total $6,947,981 as of September 30, 2001 as compared to
$5,831,628 as of June 30, 2001. They include accounts payable of $2,364,608 as
of September 30, 2001 as compared to $2,505,457 as of June 30, 2001. Accrued
expenses of $1,644,422, which include an origination fee payable of $1,078,664
as of September 30, 2001, compared with accrued expenses of $1,340,533, which
include an origination fee payable of $679,664 as of June 30, 2001. Notes
payable totaled $4,666,425, net of a debt discount of $806,665 for the quarter
ended September 30, 2001 (including notes payable to related parties of
$197,391) as compared to $3,907,305, net of a debt discount of $597,713 for the
year ended June 30, 2001 (including notes payable to related parties totaling
$367,390).
Stockholders equity: Common shares increased from 24,746,059 as of June 30, 2001
to 26,395,244 as of September 30, 2001. The increase for the quarter is the
result of an issuance of 1,523,550 shares to officers and employees pursuant to
the Employee Equity Participation Incentive Plan, 76,845 related to option
conversions, 30,000 shares issued to a consultant pursuant to the Management
Incentive Plan, and 18,790 shares related to a conversion of shares of Series A
Convertible Preferred Stock. Total shareholders equity was a deficit of
$5,794,431 as of September 30, 2001 as compared to a deficit $5,268,081 as of
June 30, 2001.
Total liabilities and stockholder's equity was $2,880,226 as of September 30,
2001 as compared to $2,485,214 as of June 30, 2001.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2001 COMPARED
WITH THE QUARTER ENDED MARCH 31, 2000
Sales: Sales decreased to $2,930,538 for the quarter ended September 30, 2001
from $3,973,334 for the quarter ended September 30, 2001. This is a 26%
decrease. The short-fall resulted from a reduction in catalog mailings, a
slowing economy, and difficult business environment. Online sales for the first
quarter of 2001 were $362,483 as compared to $307,625 in the first quarter of
2000, which is an 18% increase.
Cost of Sales: Cost of sales was $1,992,718 as of September 30, 2001 as compared
to $2,816,009 as of September 30, 2000. This is a 30% decrease and is partially
the result of the impact of lower sales for the quarter ended September 30,
2001.
Gross profit: Our gross profit was $937,820 or 32% as of September 30, 2001 as
compared to $1,157,325 or 29% as of September 30, 2000. The increase in gross
margins is partially the result of obtaining vendor discounts and a
corresponding decrease in payroll expense.
Selling expenses: Selling expenses were $142,313 for the quarter ended September
30, 2001 as compared to $848,354 for the quarter ended September 30, 2000. The
decrease in selling expenses is partially attributed to a revised catalog
printing and mailing schedule from the same quarter in 2000, our decision to
reduce our catalog mailings and recapturing deferred advertising in the amount
of $413,865.
11
Administrative and general expenses decreased to $951,242 during the quarter
ended September 30, 2001 as compared to $1,969,431 for the quarter ended
September 30, 2000. This reflects a 52% decrease. In the past year, we have
significantly reduced our payroll, restructured our management team, and
utilized our technology capabilities to reduce costs.
Depreciation and amortization expenses for the quarter were $257,652, which
included $190,048 of amortization of the debt discount payable as of September
30, 2001, as compared to $1,430,276 as of September 30, 2000. The decrease is
the result of the elimination of all goodwill as of June 30, 2001. Our
elimination of goodwill was in accordance with FAS 121.
Loss from operations was $413,387 as of September 30, 2001 as compared to a loss
of $3,090,736 for the quarter ended September 30, 2000. The quarter ended
September 30, 2000 included $1,374,731 of goodwill amortization.
Interest expense was $113,464 for the quarter ended September 30, 2001 as
compared to $85,990, net of interest income of $5,184 for the same period in
2000.
Income tax benefit: We currently have substantial net operating losses (NOL'S)
from inception through September 30, 2001. At this time, no income tax benefit
has been recognized since the recoverability of these NOL's is doubtful.
Net loss: We had a $526,851 net loss for the quarter ended September 30, 2001 as
compared to a $3,176,726 loss for the quarter ended September 30, 2000. Non-cash
items for the
quarter ended September 30, 2000 included goodwill amortization of Humboldt
Industries, AllPets.com, WeRPets.com, Chartendure, Ltd., stock issued for
services, and stock compensation expenses, all of which totaled $1,766,459.
LIQUIDITY AND CAPITAL RESOURCES
We currently do not have sufficient capital resources to fund operations in the
near term. We believe accessing the capital markets through our equity line of
credit is no longer a viable alternative, and we are considering terminating the
equity line of credit agreement. Recently, we have received loans to fund
operations, in part to mitigate the extreme potential dilution associated with
an equity sale alone. Although we have been successful in attracting funds
through these efforts, there can be no assurance we will be able to attract
additional funding.
RECENT EVENTS
The difficult market environment has impacted our ability to attract significant
capital and our ability to fully execute our business plan. We have aggressively
reduced expenses at all levels, which has resulted in a significantly lower cost
structure. Although these expense reductions have affected our current business
by impeding its future growth, management believes that they are necessary. The
tragic events of September 11, 2001 and general consumer sentiment have impacted
out catalog and online revenues. We believe that our revenues will return as our
customers and the economy recover.
On October 1, 2001 we completed the sale of our Lonoke, Arkansas facility. The
total proceeds of $425,000 were used to pay closing expenses and to reduce the
debt collateralized by the facility.
On October 12, 2001, we entered into an agreement with TS&B, Inc. to build,
maintain and host their web site for a period of two years. For the service, we
were compensated with 175,000 common shares of TS&B, Inc. The value of the
agreement is $82,250, based on the closing price of TS&B, Inc. common stock on
October 12, 2001 as reported on the Over-the-Counter Bulletin Board.
On November 8, 2001 we changed our principal independent accounting firm from
Ernst & Young LLP to Kronick, Kalada, Berdy & Co. The Board of Directors
recommended management perform a search for a suitable alternative accounting
firm. Kronick, Kalada, Berdy & Co.'s history with
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Humboldt Industries and its proximity to our Pennsylvania facility were factors
in the decision to retain its services. The Company did not have any
disagreements with Ernst & Young on any matters of accounting principals or
practices or financial statement disclosure.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Pet Quarters is not currently involved in litigation other than matters
which are routine and incidental to its business.
ITEM 2. CHANGES IN SECURITIES.
a) Common stock issued by the Company during the first quarter was as
follows:
(1) 18,790 shares issued upon conversion of convertible preferred stock.
(2) 1,523,550 shares issued through the Employee Equity Participation
Incentive Plan (EEPIP)
(3) 76,845 shares issued through stock option conversions.
(4) 30,000 shares issued to a consultant pursuant to the Management
Incentive Plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to the vote of stockholders during
the first quarter.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
1. On August 28, 2001, Pet Quarters filed a Current Report on Form 8-K
concerning certain loans received by Pet Quarters.
2. On September 11, 2001, Pet Quarters filed a Current Report on Form 8-K
concerning certain loans received by Pet Quarters.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PET QUARTERS, INC. (Registrant)
Date November 14, 2001 /s/ Steve Dempsey
------------------ --------------------------------------
Steve Dempsey, President
Date November 14, 2001 /s/ Gregg Rollins
------------------ --------------------------------------
Gregg Rollins, Chief Financial Officer
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