U.S. Securities and Exchange Commission
Washington, D.C. 20549
Amendment No. 2 to
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
FOR SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
PETMEDEXPRESS.COM, INC.
(Name of Small Business Issuer in its charter)
Florida 65-0680967
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1440 SW 29 Avenue
Pompano Beach, FL 33069
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 979-5995
Securities to be registered pursuant to 12(b) of the Act: None
Securities to be registered pursuant to 12(g) of the Act: Common Stock $.001
par value
(Title of Class)
<PAGE>
Page 1 of __ pages
Exhibit Index begin page __
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page No.
--------
<S> <C> <C>
PART I
Item 1. Business ............................................................................................... 1
Item 2. Management's Discussion and Analysis or
Plan of Operation.......................................................................................15
Item 3. Description of Property.................................................................................22
Item 4. Security Ownership of Certain Beneficial
Owners and Management...................................................................................22
Item 5. Directors, Executive Officers, Promoters and Control Persons............................................25
Item 6. Executive Compensation..................................................................................28
Item 7. Certain Relationships and Related Transactions..........................................................32
Item 8. Description of Securities...............................................................................33
PART II
Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters.............................................................37
Item 2. Legal Proceedings.......................................................................................38
Item 3. Changes in and Disagreements with Accountants...........................................................40
Item 4. Recent Sales of Unregistered Securities.................................................................40
Item 5. Indemnification of Directors and Officers...............................................................42
PART F/S
Financial Statements..............................................................................F-1-F-23
PART III
Item 1. Index to Exhibits.......................................................................................43
</TABLE>
<PAGE>
A SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This discussion in this registration statement regarding PetMedExpress
and its business and operations contains "forward-looking statements." These
forward-looking statements use words such as "believes," "intends," "expects,"
"may," "will," "should," "plan," "projected," "contemplates," "anticipates," or
similar statements. These statements are based on PetMedExpress= beliefs, as
well as assumptions it has used based upon information currently available to
it. Because these statements reflect PetMedExpress= 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 PetMedExpress=
securities or not, should not attribute undue certainty on these forward-looking
statements, which apply only as of the date of this registration statement.
INFORMATION REQUIRED IN REGISTRATION STATEMENT
ITEM 1. BUSINESS.
Overview
PetMedExpress is a leading multi-channel retailer of prescription and
non-prescription pet medications and related pet products for dogs and cats. We
offer consumers a significant cost savings and the convenience of purchasing pet
products either from our catalog or through our web site.
We were incorporated in the state of Florida in January 1996. From
inception until approximately August 1996, our operations consisted mostly of
start-up activities which included the development and refinement of a business
plan, and beginning the process of obtaining the necessary licenses and permits
to dispense prescription medications. We began our operations in September 1996,
and in the fall of 1997 we issued our first catalog, which displayed
approximately 1,200 items which were prescription and non-prescription pet
medications, as well as pet accessories and health supplements. We have now
expanded our product line to approximately 2,400 of the most popular pet items
for dogs and cats.
From September 16, 1997 until March 9, 2000, our common stock was
traded on the over the counter market on the OTC Bulletin Board ("OTCBB") under
the symbol "PETS". Since March 9, 2000, it has been quoted on the National
Quotation Bureau Electronic Quotation Service. We are not a "fully reporting
company" as this term relates to the periodic reporting to the Securities and
Exchange Commission ("SEC") on forms 10-K, 10-Q, 8-K, etc., but we intend to
become "fully reporting" upon the clearance of this Form 10-SB Registration
Statement with the SEC. Our deadline, as imposed by the National Association of
Securities Dealers, Inc. ("NASD"), to become "fully reporting" was March 8,
2000. Because we were are unable to meet this deadline our common stock is no
longer being traded on the OTCBB.
1
<PAGE>
Following the effective date of this registration statement, we intend
to use our best efforts to have our common stock re-approved for quotation on
the OTC Bulletin Board. We cannot guarantee you that we will be successful in
this goal. In that event, our common stock will continue to be quoted on the
National Quotation Bureau Electronic Quotation Service which reduces the
tradeability of our common stock, and will probably have a negative impact on
its per share price.
The terms "PetMedExpress," "we," "our," and "us" refer to
PetMedExpress.com, Inc. and our wholly-owned subsidiary, Southeastern Veterinary
Exports, Inc. The information contained on our web site is not part of this
registration statement.
An Overview of Our Industry
The pet products industry is a large and growing market. According to
the American Pet Products Manufacturers Association (APPMA), U.S. consumer
spending on pet products and services was approximately $23 billion in 1998, and
is estimated to grow to approximately $29 billion by 2001. Pets have become an
increasingly important part of U.S. households. The 1999 APPMA National Pet
Owners Survey found that in 1998 approximately 61% of all U.S. households owned
a pet, and of those households more than five out of 10 owned a dog or a cat.
Store-based pet supply retailers have traditionally served the pet
product market in the United States; however, such retailers have not
traditionally sold prescription and non-prescription medications. These
retailers include superstores such as Petco Animal Supplies, Inc. and PetsMart,
Inc., grocery store retailers such as the Kroger Company and Safeway, Inc., mass
market retailers such as Wal Mart Stores, Inc. and Kmart Corporation, and
smaller, independent specialty pet products stores. Likewise, veterinarians have
historically controlled the distribution of prescription and non-prescription
pet medications.
While in the aggregate these channels provide consumers with a wide
selection of pet related products, and access to prescription and
non-prescription medications, we believe these traditional distribution channels
have the following limitations:
TRADITIONAL PET PRODUCT RETAILERS DO NOT SELL PRESCRIPTION AND NON
PRESCRIPTION MEDICATIONS. PetMedExpress was founded, in part, to provide pet
owners with an alternative source for pet medication. The introduction of easy
to use, highly effective heartworm medications and flea and tick products has
broadened the category from pet medications used to treat isolated or specific
illnesses. Pet owners are now also regularly purchasing pet medications such as
Advantage(R) and Frontline(R) for flea and tick control, and Heartgard (R) for
protection against heartworms.
Historically, veterinarians have been the almost exclusive source for
pet owners to purchase prescription and non-prescription pet medications,
including flea and tick control products. Pet retailers, such as Petco Animal
Supplies, Inc., PetsMart, Inc. and Pets.com, Inc., do not sell prescription and
non-prescription pet medications. There is virtually no competition among
veterinarians, which results in higher prices to consumers. We believe
2
<PAGE>
we offer dog and cat owners an attractive alternative source for pet medications
at competitive prices.
LIMITED GEOGRAPHIC COVERAGE. The few pet retailers who do tend to offer
a broader selection of products either operate on a regional basis or only in
metropolitan areas. This leaves a significant percentage of the U.S. population
without easy access to all of the products they need for their pets. Opening
additional stores would require substantial investments in real estate and
inventory, as well as in trained personnel, for these chain stores. The high
cost of opening and maintaining additional stores further limits the ability of
retailers to serve geographic areas that are not densely populated. We offer dog
and cat owners nationwide the convenience of shopping at home, ease of ordering
and reordering by phone or the Internet, and rapid home delivery.
LACK OF ONE-STOP SHOPPING FOR PET PRODUCTS. The pet products retail
market is fragmented, generally requiring consumers to shop at multiple outlets
to find everything they need for their pets. For example, superstore retailers,
grocery stores and mass market retailers tend to carry a deep selection of well
known brand name pet products from leading vendors, but have fewer specialty
products. Specialty pet stores instead tend to carry a broader selection of
specialty products from smaller vendors, but usually have a limited selection of
the more well known brand name products. This lack of one-stop shopping also
applies to other online retailers who have chosen to duplicate the traditional
retail model in terms of selection and are offering a subset of a superstore
product mix. Because we sell prescription and non-prescription pet medications
as well as pet products, we believe we offer the broadest product selection, of
any of our competitors.
Our Business Strategy
Our objective is to become the world=s leading retailer of prescription
and non-prescription pet medications and related pet products. The key
components of our strategy include:
* INCREASING AWARENESS OF THE PETMEDEXPRESS BRAND NAME. We believe that
by continuing to increase the awareness of pet owners of the cost benefits of
purchasing prescription and non-prescription pet medications from us, we will be
able to increase our brand awareness. Our marketing strategy is designed to
attract customers most likely to shop by either catalog or online, and we have
historically used a combination of television and direct marketing to market our
products. Since we began our operations, we have continued to increase the
amount of funds spent on advertising. For the fiscal years ended March 31, 1997,
1998 and 1999, we spent $36,202, $307,380 and $867,160 on advertising expenses,
and for the nine months ended December 31, 1999 we spent $1,141,328. We
anticipate that we will continue to spend an amount comparable to the current
levels on advertising expenses in the future. We cannot, however, estimate at
this time the exact amounts that we will devote to advertising in the future as
we are presently dependent upon cash flow from operations to provide these
funds. If we are unable to continue to
3
<PAGE>
devote amounts comparable to the current levels to advertising expenses in the
future, our ability to increase our brand awareness will be adversely affected.
* ENHANCING OUR CUSTOMER=S SHOPPING EXPERIENCE BY EXPANDING OUR WEB
SITE. While we have maintained a web site since 1997, we have used this site
primarily to support our catalog sales. While only approximately 2.5% of our
sales are currently made on the Internet, we believe that our products are
particularly well-positioned to be marketed and sold over the Internet. In March
2000, we anticipate that we will launch our expanded web site. From our new home
page, visitors to our web site will be able to access the shopping area and
search our web site for products or content. Enhanced shopping features will
include the ability to search for products by either pet type, category, or
product line, personalized shopping lists, and a community section which will
include discussion forums for pet owners. We believe our expanded web site will
provide us with the opportunity of expanding our online sales.
An emphasis on online sales is a new business and marketing strategy
for us, and it involves risks and uncertainties. We cannot guarantee that the
expansion of our web site will result in increased sales of our products. We may
not be successful in attracting consumers to our web site, or in marketing our
products over the Internet. If we are unsuccessful in generating additional
sales from our web site, we may not recover the funds we are investing in
expanding the web site. See Item 2. Management=s Discussion and Analysis of
Financial Condition and Results of Operations. Because we will post product
information and other content on our expanded web site, we could 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. 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 growth of our online sales will also be subject to various factors
which are beyond our control, including the continued growth of Internet
commerce. Rapid growth in the use of the Internet as a medium of commerce has
only recently occurred, and we cannot guarantee that it will ever develop a
sufficiently broad base of consumers. Likewise, we cannot guarantee that the
adoption of future laws governing commerce on the Internet, including the
collection of sales taxes or laws relating to the transmission of data over the
Internet, will not adversely affect its continued growth. Lastly, substantial or
on-going security breaches of our system, or other Internet-based systems, could
erode consumer=s confidence in online commerce which could materially adversely
affect our ability to increase our online sales.
* EXPANDING OUR COMMUNITY PARTICIPATION THROUGH OUR VETERINARY REFERRAL
PROGRAM. Our goal is to establish a nationwide network of community
veterinarians to whom we can refer our customers. We believe this veterinarian
referral network will foster relationships between pet owners and veterinarians,
as well as building relationships between PetMedExpress and veterinarians across
the United States. Currently, a high
4
<PAGE>
percentage of our potential customers wish to buy various medications from us,
including heartworm medication and flea and tick control products, but have
either not established, or do not have, an ongoing relationship with a
veterinarian. At the request of our customer, we will book an appointment on the
customer=s behalf with a community veterinarian who is part of our referral
network, and provide follow up support to help to ensure that the appointments
are kept.
We will receive no compensation from either the veterinarian or the
customer for the referral services for our customers. Veterinarians
participating in our veterinary referral network will agree to provide our
customers with a one-time discount from the cost of the veterinarian=s services.
Although we have not yet established a veterinary referral network, we
anticipate that the initial phase of our network will be established in Florida
during calendar 2000, expanding nationwide by 2002. This program requires
minimal funds to implement, and we are paying the costs associated with it from
our general working capital. We cannot guarantee, however, that we will be
successful in implementing the program on a nationwide basis, or that it will be
well received by our customers.
* DEVELOPING AND MARKETING PRIVATE LABEL MEDICATIONS AND PRODUCTS.
Patents for various pet medications have and will continue to expire. Subject to
obtaining sufficient capital to fund the project, we anticipate that we will
introduce generic equivalents of prescription and non-prescription pet
medications to be sold under our private label. We have not developed any
private label medications to date. We believe that private label medications
will provide us with the opportunity of increasing our gross profit margins, and
offer additional distribution channels for our products. We presently anticipate
that our initial efforts in the area of generic medications will be through the
introduction of a private label heartworm medication under the brand name
Heartshield (TM). To undertake this project, we have engaged a pharmaceutical
research company to develop the formula for the product and undertake on our
behalf all of the actions necessary to receive U.S. Food and Drug Administration
(FDA) approval for the product. When appropriate during the developmental
process, we will also engage a third-party generic pharmaceutical manufacturing
company to prepare the samples necessary for the approval process, and select an
FDA-approved laboratory for testing of these samples. We have not identified the
manufacturer or laboratory at this time.
We did not invest any funds in the development of Heartshield(R) during
the fiscal years ended March 31, 1997, 1998 or 1999. During the nine months
ended December 31, 1999, we have invested approximately $28,600 in the
preliminary stages of this project. These funds have come from our general
working capital. We cannot estimate at this time what the total cost of this
project will be to us. It will, however require substantial additional capital
in order to complete this project, and as of the date of this registration
statement, we do not have sufficient capital to fund the entire project. See
Item 2. Management=s Discussion and Analysis of Financial Condition and Results
of Operations. While we have not established a specific time line for the
introduction of this first product, we anticipate that it will not occur for at
least two years from the date of this registration statement.
5
<PAGE>
We recognize that development and approval processes for generic
medications are highly risky ventures, requiring a significant commitment by us
in both management time and financial resources. The development and marketing
of generic medications will also subject us to various risks and uncertainties.
We have no experience or expertise in the development of generic
pharmaceuticals, and we are totally dependent upon third-parties to provide
these services for us.
We cannot guarantee that we will be successful in obtaining FDA
approval for Heartshield (TM), or if we do obtain the approval, that we have
sufficient financial resources to proceed with the project. Likewise, even if
sufficient capital is available, we may decide not to go forward with the
manufacturing and marketing of the product for a variety of reasons, including
market conditions which may change pet owners= purchasing habits. If we do
decide to market the product, we cannot guarantee that it will be well received
by our customers. We cannot guarantee that the funds we have invested to date in
this project, together with any funds we may invest in the future, will result
in any sales. Finally, the manufacture and sale of a private label medication
will subject us to increased liability that our general liability insurance may
not cover.
We also intend to introduce a line of private label health and
nutritional supplements, such as daily vitamins, chew treats and dog bones
containing vitamins and other nutritionals. We anticipate that we will contract
with a third-party manufacturer for these private label products. Finally, we
anticipate expanding our product line to include a line of private label
accessories for dogs and cats. These products may include medicated shampoos for
a variety of skin conditions and rawhide chews. As with our line of private
label health and nutritional supplements, we will obtain these products from a
third-party private label manufacturer.
The negotiations with the private label manufacturers for both the
accessory line as well as the health and nutritional supplements are in the
preliminary stages. We do not anticipate that we will be required to make any
significant capital expenditures related to our introduction of private label
health and nutritional supplements or private label accessories. We currently
anticipate both private label product categories will be launched during
calendar 2001.
* DEVELOPING AND EXPANDING STRATEGIC ALLIANCES AND PARTNERSHIPS. We
intend to pursue marketing alliances and other strategic relationships to
attract additional customers, increase our brand recognition and expand our
distribution channels. We have recently become a member of the LinkShare
Network, an affiliate program with more than 150 merchant clients and 65,000
affiliate web sites. Designed to develop and build a long-term, branded
affiliate program in order to increase online sales and establish an Internet
presence, we believe the LinkShare Network will enable us to establish link
arrangements with other web sites, as well as portals and search engines. We
made an initial investment of approximately $5,000 for the purchase of the
software from the LinkShare Network. Our annual membership in the LinkShare
Network is $1,000, and we will pay the LinkShare Network an additional fee equal
to 2% to 3% of all sales we make through affiliates we
6
<PAGE>
establish as a result of our membership in the network, with a minimum monthly
payment of $2,000.
As of the date of this registration statement we have not established
any marketing alliances or strategic relationships with any other third parties.
We do not currently have any link arrangements with other web sites or tie-ins
with search engines. We are still developing our methods of pursuing this growth
strategy, and we are not currently engaged in any discussions or negotiations
regarding potential alliances or partnerships. At this time we are unable to
estimate the cost to us of establishing marketing alliances or strategic
relationships with third parties. We cannot guarantee that we will be successful
in achieving this goal. If we do not succeed in establishing marketing alliances
or other strategic relationships, we may not be successful in increasing our
sales and our results of operations may be adversely affected.
The PetMedExpress Solution
We believe our multi-channel approach of selling our products through
our catalog and online provides us with significant marketing, sales and
operational synergies, and provides our customer with enhanced shopping
flexibility and superior customer service.
In addition to prescription and non-prescription medications, our
product line, currently geared toward dog and cat owners, provides customers
with a wide variety of selection across the most popular categories as follows:
Dogs Cats
---- ----
Apparel Beds
Beds Books
Behavior Modification Bowls
Bones Cages & Accessories
Books Calendars
Bowls & Supplies Carriers
Calendars Catnip & Cat Grass
Carriers Collars
Chews Doors & Barriers
Collars Feeders & Waterers
Containment Flea & Pest Control
Doors & Barriers
Ears, Paws, etc. Furniture
Feeders & Waterers Grooming
Flea & Pest Control Harnesses
Health Care & Remedies
Food Containers Holiday
Grooming I.D. Tags & Belts
7
<PAGE>
Hair Lifters & Rollers Leashes
Harnesses
Health Care & Remedies Litter Box Supplies
Holiday Litter Boxes
Houses & Accessories
I.D. Tags Repellents
Leashes Scratchers
Stain & Odor
Outdoor Clean-Up Toys
Rawhide Training
Repellents Treats
Safety & First Aid Vitamins & Supplements
Stain Odor
Tie-Outs
Toys
Training
Treats & Biscuits
Videos & CDs
Vitamins & Supplements
The following table provides a breakdown of the percentage of our total
sales contributed by each category listed during the period indicated:
<TABLE>
<CAPTION>
Nine Months
Year Ended March 31, Ended
1997 1998 1999 December 31, 1999
--------------------------------------- -----------------
<S> <C> <C> <C> <C>
Prescription medications 33% 35% 28% 27%
Non-prescription
medications 60% 50% 54% 58%
Health and
nutritional supplements 0% 2% 3% 2%
Accessories 0% 5% 4% 3%
Memberships, shipping
charges and other 7% 8% 11% 10%
</TABLE>
We experience certain seasonality in our business because the sales of
flea and tick products and heartworm medications are historically stronger in
the spring and summer periods. As we attempt to expand our sales of pet
accessories and gift items we may also expect to experience proportionally
stronger sales of this merchandise in the Christmas holiday period.
The PetMedExpress Pharmacy
We operate a full-service pharmacy and we are licensed in all 50
states. Our pharmacy stocks approximately 250 different prescription
medications, which includes medications most likely to be prescribed by a
veterinarian that can be administered by a pet
8
<PAGE>
owner. The most common prescribed medications sold by us are prepackaged for
easy application and administration, and include heartworm tablets, antibiotics,
anti-inflammatory medications and vaccination kits.
Prescription medications cannot be dispensed without a prescription or
authorization from a veterinarian, or an authorized agent in the veterinarian=s
office. When an order is received, we request the customer either provide us
with:
- the original prescription,
- a faxed copy of the original prescription, or
- the name and telephone number of their veterinarian.
In the absence of an original or faxed prescription from the customer,
our pharmacist receives verbal authorization from the prescribing veterinarian
or an authorized agent in the veterinarian=s office before we ship the
medication.
Since we began our operations, from time to time a number of
veterinarians have resisted either providing our customers with a copy of their
pet=s prescription or authorizing the prescription to our pharmacy staff.
Veterinarians have historically been the primary source of prescription and
non-prescription pet medications for pet owners. There has been little incentive
for veterinarians to offer discounted prices on these medications as there has
been almost no competition in the distribution of the products. We believe this
resistance or refusal to verify prescriptions on the part of some veterinarians
is economically driven, as we sell the same medications as veterinarians but at
discounted prices.
Florida law provides that a veterinarian license could be in jeopardy
for "failing to give the owner of a patient, before dispensing any drug, a
written prescription when requested" and similar laws exist in other states in
which we are licensed to prescribe medications. As a function of our customer
service, our sales personnel, when necessary, will make the pet owner aware that
the prescription is the property of the pet owner and not the veterinarian.
We are not able to accurately estimate the number of incidences when
veterinarians have either initially resisted in, or refused to, cooperate with
us in verifying prescriptions. If the number of veterinarians who refuse to
authorize prescriptions to us should increase, our results of operations could
be materially adversely affected.
Marketing
We focus our marketing efforts on a combination of television
advertising, direct catalogue mailings, promotions, an Internet presence,
telemarketing and superior customer service to attract and retain our customers.
9
<PAGE>
TELEVISION. In October 1997, we began our first televised advertising
campaign -- testing different cable channels, commercial lengths and telecast
times. Our television ads typically focus on the savings available to consumers
through purchasing from PetMedExpress. The ads run either 30 or 60 seconds, are
usually purchased on a spot basis, and can run from one to five times in a 24
hour period. We advertise on The Animal Planet, the PreVue Channel and the Food
Network.
THE PETMEDEXPRESS CATALOG. Our PetMedExpress catalog, a full-color
catalog, is organized by category and generally features approximately 2,400
products. The catalog is produced by a combination of our in-house staff of
writers and production artists, and outside contract professionals. During 1999,
we mailed a total of approximately one million catalogs. In 1999, we published
three issues of our catalog, including a separate seasonal gift and accessory
catalog for the Christmas season.
THE INTERNET. We also market our products through our web site at
www.petmedexpress.com which we have maintained since August 1997. Our web site
offers the same product selection as our catalog, and offers our customers the
convenience of ordering 24 hours a day, seven days a week. Customers ordering
products from our web site pay for the purchase via credit card. We do not
accept cybercash and have no present intention to do so in the near future.
Because we accept customer orders from our web site, the secure
transmission of credit card information over the Internet is essential to
maintain consumer confidence in our web site. Substantial or ongoing security
breaches of our system, or other Internet-based systems, could significantly
harm our business. Any penetration of our network security or other
misappropriation of our users' personal information could expose us to
liability. We may be liable for claims based on unauthorized purchases with
credit card information, impersonation or other similar fraud claims. Claims
could also be based on other misuses of personal information, including claims
for unauthorized marketing purposes. These claims could result in litigation and
financial liability. Security breaches also could damage our reputation and
expose us to a risk of loss or litigation, and possible liability. We rely on
licensed encryption and authentication technology to effect secure transmission
of confidential information, including credit card numbers. It is possible that
advances in computer capabilities, new discoveries or other developments could
result in a compromise or breach of the technology used by us to protect
customer transaction data.
We may incur substantial expense to protect against and remedy security
breaches and their consequences. We cannot presently estimate the amount of any
such expenses. A party that is able to circumvent our security systems could
steal proprietary information or cause interruptions in our operations. The
limits of our insurance policies may not be adequate to reimburse us for losses
caused by security breaches. We cannot guarantee that our security measures will
prevent security breaches.
PETMEDEXPRESS DISCOUNT CLUB. In July 1997, we established the
PetMedExpress Discount Club as a way of making the PetMedExpress shopping
experience easier and
10
<PAGE>
more rewarding for our customers. Membership is $19.95 annually or $49.95 for a
three year membership. Members are eligible for the automatic planned
replacement program where replacement medications are shipped at pre-scheduled
intervals, as specified by the member. Prescription medications which have one
or more refills can also be included in our automatic planned replacement
program for the duration of the prescription. Members are automatically enrolled
in our "Refer-A-Friend" Program where they receive a $3.00 merchandise credit
every time a referred friend or family member places an order. Members are
guaranteed the lowest prices on our products, receiving discounts of up to 30%,
and we will match any competitor=s price at the time of order.
In October 1999, we initiated our accelerated customer acquisition
program, which included expanding our infrastructure through the purchase of new
hardware and software, and redesigning various internal procedures in areas of
sales and customer service in an effort to support increased numbers of
customers in the future. We are also increasing our support staff, including
hiring additional staff in our pharmacy to process prescription authorizations
and hiring additional management information systems personnel. Our new customer
acquisition program also involves our implementation of new marketing
techniques, including the use of refined demographic indicators to better target
our customers, and production of a new catalog with an improved layout, higher
quality product photos and expanded content. As of the date of this registration
statement, we have substantially completed implementation of this program. See
Item 2. Management=s Discussion and Analysis of Financial Condition and Results
of Operations. While we believe this program will enable us to increase our
customer base and sales, we cannot guarantee that we will be successful in our
efforts.
Purchasing and fulfillment
We purchase our products from a variety of sources, including
manufacturers, domestic and international distributors and veterinarians. We
have multiple sources for each of our products. We source supplies of
prescription and non-prescription medications from a variety of national and
international distributors in order to ensure the lowest possible price. We
purchase approximately 85% of our health and nutritional supplements from Eight
in One Pet Products, and we purchase accessories directly from the
manufacturers, including Farnam Companies, Inc. and Aspen Pet Products.
Historically, substantially all the major manufacturers of prescription
and non-prescription pet medications have declined to sell these products
directly to direct marketing companies, including us. For the nine months ended
December 31, 1999, sales of prescription and non-prescription medications,
including heartworm medication such as Heartgard(R) and flea and tick control
products such as Frontline (R) and Advantage (R), represented approximately 85%
of our sales. Merial Ltd., a multi-national pharmaceutical company which
manufactures, among other products, Heartgard(R) heartworm medicine and
Frontline(R), a flea control spray, and Bayer Corporation, another
multi-national pharmaceutical company which manufactures, among other products
Advantage(R) flea medication, have refused to sell these products directly to
us. We believe this refusal is
11
<PAGE>
based upon the manufacturer=s position that direct marketing companies interfere
with the veterinarian-pet treatment relationship. We believe our policy of
verifying prescriptions prior to shipment and encouraging our customers to seek
regular care for their pets enhances the veterinarian-pet treatment
relationship. Although we have been able to obtain a sufficient supply of these
products from wholesalers and distributors, there can be no assurance that we
will not encounter difficulties in the future, particularly in light of our
anticipated growth. In addition, since we do not always have established
relationships with manufacturers, our cost of product may be higher than if we
purchased these products directly from the manufacturer.
We have built 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 fulfillment, including selecting
the product from inventory and packaging and shipping of the product to the
customer. Products are shipped to our customers by United Parcel Service and
Priority Mail. We inventory our products and fulfill all customer orders from
our 50,000 square foot facility in Pompano Beach, Florida.
Customer Service and Our Call Center
We believe that a high level of customer service and support is
critical to retaining and expanding our customer base. Our in-house customer
service team is available via phone from 9:00 am until 11:00 pm, Monday through
Friday, 9:00 AM to 5:00 pm on Saturdays and Sundays, all Eastern time, and can
also be reached by e-mail or fax. This team is central to our ability to deliver
a superior customer experience, and strives to make a personal connection with
each customer.
Competition
The pet products market is intensely competitive and highly fragmented,
with no clear dominant leader in any of our market segments. Our competitors can
be divided into several groups:
* other direct marketers of pet medications,
* veterinarians,
* mail order suppliers of pet products,
* online stores that specialize in pet products,
* superstore retailers of pet products,
* speciality pet stores, and
* mass market retailers.
12
<PAGE>
We believe that the following are principal competitive factors in our
market:
- brand recognition
- price
- production selection
- quality of Web store content
- reliability and speed of order shipment
- personalized service
- convenience
Many of our current and potential traditional competitors have longer
operating histories, larger customer or user bases, a more established online
presence, greater brand recognition, and significantly greater financial,
marketing and other resources than we do. Many of these current and potential
competitors can devote substantially more resources to web site and systems
development than we can.
We also compete with veterinarians in the sale of prescription and
non-prescription pet medications. Many pet owners are simply unaware of
PetMedExpress and the price savings usually available to them by purchasing pet
medications from us. These same pet owners may prefer the convenience of
purchasing the pet medications at the time of the veterinarian visit, or may be
fearful of offending their veterinarian by not purchasing their pets= medication
from the veterinarian. In order to effectively compete with veterinarians, we
must continue to educate pet owners of the options offered by PetMedExpress.
Government Regulation Which Affects Our Business
Dispensing prescription medicines is governed at the state level by the
Board of Pharmacy. We are subject to regulation by the State of Florida and in
particular, are licensed by the Florida Board of Pharmacy. Our license is valid
until February 28, 2001. We are also licensed and regulated by 49 other state
pharmacy boards and other regulatory authorities, including, but not necessarily
limited to, the FDA and the U.S. Environmental Protection Agency. As a licensed
pharmacy in the state of Florida, we are subject to the Florida Pharmacy Act and
regulations promulgated thereunder, among other things. We are also subject to
regulation by the FDA and the U.S. Environmental Protection Agency (EPA). We are
not aware of any facts or circumstances which would lead us to believe our
license will not be renewed by the State of Florida or the other states in which
we are licensed following the current terms. To the extent that we are unable to
maintain our license with the Florida Board of Pharmacy as a community pharmacy,
or if
13
<PAGE>
we do not maintain the licenses granted by other state boards, or if we
become subject to actions by the FDA or EPA, or other enforcement regulators,
our distribution of prescription medications to pet owners could be severely
reduced, which would have a material adverse effect on our operations. Special
matters related to development of generic equivalents
In connection with the proposed development of generic equivalents to
medications for which the patent has expired, we will become subject to
regulation by a number of national, state and local agencies. Of particular
importance in the United States is the FDA. It will have jurisdiction over our
business as it relates to generic equivalents, and the FDA will administer
requirements covering the testing, safety, effectiveness, approval,
manufacturing, labeling and marketing of such medication. FDA requirements
and/or reviews may increase the amount of time and money necessary to develop
and bring the product to market.
We will also become subject to the jurisdiction of various other
regulatory and enforcement departments and agencies, such as the Federal Trade
Commission and the Department of Justice in the U.S., and will be, therefore,
subject to possible administrative and legal proceedings and actions by those
organizations. Such actions may include product recalls, seizures and other
civil and criminal sanctions.
It is difficult to predict the future impact of the broad and expanding
legislative and regulatory requirements affecting us.
Intellectual Property
We conduct our business under the trade name "PetMedExpress (R)." We
registered this trademark with the U.S. Patent and Trademark Office. We have
also made application to the U.S. Patent and Trademark Office for protection of
the trademark Heartshield (TM). and believe this mark has significant value, and
is important factor in the marketing of our products. We have also obtained the
right to the Internet address www.petmedexpress.com. As with phone numbers, we
do not have and cannot acquire any property rights in an Internet address. We do
not expect to lose the ability to use the Internet address, however, there can
be no assurance in this regard and such loss would have a material adverse
effect on our financial position and results of operations.
Employees
We currently have 89 full time employees, including:
- 56 in sales and telemarketing,
- 14 in fulfillment and distribution,
- 4 in our pharmacy,
- 5 in information technologies,
14
<PAGE>
- 3 in administrative positions, and
- 7 in management.
None of our employees are represented by a labor union, and we are not
governed by any collective bargaining agreements. In our opinion, we have a
satisfactory relationship with our employees.
ITEM 2. MANAGEMENT=S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read together with our consolidated
financial statements and related notes contained later in this registration
statement. The discussion contains forward looking statements that are subject
to certain uncertainties, and our actual results of operations may differ
materially from those contained in the forward looking statements.
Overview
We were incorporated in the state of Florida in January 1996. From
inception until approximately August 1996 our operations consisted mostly of
start-up activities which included the development of a business plan, and the
initial activities related to obtaining the necessary licenses and permits to
dispense prescription medications. We began our operations in September 1996,
and in the fall of 1997 we issued our first catalog which displayed
approximately 1,200 items which were prescription and non-prescription pet
medications, as well as pet accessories and health supplements. We have now
expanded our product line to approximately 2,400 of the most popular pet items
for dogs and cats, and we have continued to refine our catalog and catalog
marketing techniques. We also market our products on our web site which was
first launched in August 1997. Since October 1997, we have consistently
advertised our products on national cable TV channels such as the Animal Planet.
For the nine months ended December 31, 1999, approximately 97.5% of our
sales were made through our catalog and approximately 2.5% of our sales were
made through our web site. Our sales primarily consist of products sold to
individual consumers, or retail sales, as well as sales to other pet suppliers,
or wholesale sales. Our sales also include one and three year membership fees
which entitle the purchaser to receive a discount on purchases made during the
respective membership periods. Retail sales are generally paid for by the
customer via credit card at the time the order is placed, while certain
wholesale purchasers are allowed to pay for purchases over established payment
terms, which usually consist of requiring payment within 30 days of delivery.
While only approximately 2.5% of our sales for the nine months ended
December 31, 1999 were made on the Internet, we believe our products are
well-positioned to be marketed and sold online. Our enhanced web site, which we
believe will enable us to increase our online sales, is expected to be launched
in March 2000. Since January 1,
15
<PAGE>
2000, we have incurred approximately $30,000 of costs related to the expansion
of our web site. Accordingly, these amounts are not reflected in the December
31, 1999 balance sheet as they were incurred subsequent to that period. While we
presently estimate the total costs to us for the enhancement of our web site
will be approximately $200,000, such amount may increase before the site is
launched. These costs are being funded from our general working capital.
Results of Operations
NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
Sales
Sales increased to $11,597,084 for the nine months ended December 31,
1999, which represents an approximately 52% increase over sales of $7,629,262
for the nine months ended December 31, 1998. This increase in sales represents
an increase in sales volume which we believe is primarily the result of our
ability to recruit new customers through advertising, and to obtain reorders
from existing customers.
The following table provides a breakdown of our sales by product
category for the nine months ended December 31, 1999 and 1998:
Nine Months Ended
December 31,
1998 1999
-------------------
Prescription medications 28% 27%
Non-prescription medications 54% 58%
Health and nutritional supplements 3% 2%
Accessories 3% 3%
Memberships, shipping charges and other 12% 10%
Gross Profit
Gross profit as a percentage of sales remained relatively constant at
46% and 47% for the nine months ended December 31, 1998 and 1999, respectively.
Operating Expenses
General and administrative expenses were $2,439,867 and $4,316,622 for
the nine month periods ended December 31, 1998 and 1999, respectively. The
$1,876,755, or approximate 77%, increase for the nine months ended December 31,
1999 is primarily due to:
16
<PAGE>
- customer support and administrative salaries and expenses which
increased from $1,202,014 for the nine months ended December 31, 1998 to
$2,083,777 for the nine months ended December 31, 1999 as a result of the hiring
of additional personnel to support the higher levels of sales,
- credit card fees which increased from $198,352 for the nine months
ended December 31, 1998 to $277,556 for the nine months ended December 31, 1999,
as a result of increased sales,
- an increase in bad debt expense of approximately $165,000, as well as
$180,000 of litigation settlements in the 1999 period,
- bad debt expense increased during the nine months ended December 31,
1999, as a result of an interruption in our collection efforts primarily due to
a turnover in the personnel in our accounting department who were responsible
for these functions. We have since strengthened our collection staff and
procedures, and we do not believe that we will experience similar interruptions
in the future.
- approximately $200,000 related to the hiring of several senior
management personnel, including our COO and our director of management
information services.
General and administrative expenses as a percentage of sales were
approximately 32% and 37% for the nine month periods ended December 31, 1998 and
1999, respectively. While there has been an increase in general and
administrative expenses for the nine month period ended December 31, 1999 from
the comparable period in the prior year as described above, we anticipate that
the increase in these expenses as a percentage of sales should decline as sales
increase.
Advertising expense increased from $556,779 for the nine months ended
December 31, 1998 to $1,141,328 for the nine months ended December 31, 1999. The
increase in advertising expense was primarily due to catalog production and
distribution costs which increased from $173,524 for the nine months ended
December 31, 1998 to $563,400 for the nine months ended December 31, 1999, as
well as increased television advertising costs which increased from $277,503 to
$399,336 in those respective periods.
Depreciation and amortization increased from $67,350 for the nine
months ended December 31, 1998 to $254,637 for the nine months ended December
31, 1999 as a result of purchases of additional computer and office equipment to
support our increased levels of sales and personnel, as well as approximately
$60,000 of depreciation on our building which was purchased in March 1999.
Other income (expense)
Interest expense increased $177,767 for the nine months ended December
31, 1999 from the nine months ended December 31, 1998 as a result of interest
related to the note and mortgage for our building which we purchased in March
1999. Other, net, for the nine months ended December 31, 1998 primarily
consisted of nonrecurring rental and marketing income.
17
<PAGE>
Income Taxes
There was no income tax accrual for the nine month period ended
December 31, 1998 due to the utilization of prior net operating losses to offset
taxable income for the period. For the nine month period ended December 31,
1999, no tax provision was recorded since we anticipate no tax expense will be
incurred during fiscal 2000.
Net Income (Loss)
We recorded net income of $512,552 for the nine months ended December
31, 1998. However, a one-time non-cash charge of $771,525 for the accretion for
beneficial conversion feature of preferred stock was incurred during the period,
which resulted in a $258,973 loss available to common stockholders. For the nine
months ended December 31, 1999, we recorded a net loss of $472,563. The
accretion for beneficial conversion feature represents a non-recurring non-cash
charge that resulted from the issuance of Convertible Preferred Stock with a
common stock conversion price that was lower than our common stock market price
on the date of issuance.
YEARS ENDED MARCH 31, 1999 (FISCAL 99), MARCH 31, 1998 (FISCAL 98) AND MARCH 31,
1997 (FISCAL 97)
Sales
In fiscal 97 we were in operation approximately six months, and
generated $602,191 in sales, followed by sales of $3,493,534 in fiscal 98, our
first full year of operation, and sales in fiscal 99 of $10,224,178. The
increase in sales represents an increase in sales volume which we believe is
attributable to advertising and marketing campaigns which assisted in increasing
our customer base, as well as reorders from existing customers. The following
table provides a breakdown of our sales by product category for fiscal 97,
fiscal 98 and fiscal 99:
Year Ended March 31,
---------------------------------
1997 1998 1999
---- ---- ----
Prescription medications 33% 35% 28%
Non-prescription medications 60% 50% 54%
Health and nutritional supplements 0% 2% 3%
Accessories 0% 5% 4%
Memberships, shipping charges and other 7% 8% 11%
Gross Profit
Gross profit represents the difference between the sale price of an
item and its weighted average cost. Our gross margin as a percentage of sales in
fiscal 97, fiscal 98 and fiscal 99 was approximately 42%, 42% and 45%,
respectively, reflecting the impact of volume purchasing on our product
acquisition costs as our sales increased.
18
<PAGE>
Operating Expenses
General and administrative expenses were $492,873, $2,309,498 and
$3,386,641 for fiscal 97, fiscal 98 and fiscal 99, respectively. The increase in
general and administrative expenses from fiscal 97 to fiscal 99 is primarily
attributable to:
- customer support and administrative salaries and expenses which
increased from $427,206 in fiscal 97 to $1,099,132 and $1,822,591 in fiscal 98
and fiscal 99, respectively, as a result of the hiring of additional personnel
to support the higher levels of sales in fiscal 98 and fiscal 99,
- credit card fees, which increased from $11,537 in fiscal 97 to
$87,442 and $236,298 in fiscal 98 and fiscal 99, respectively, as a result of
increased sales, and
General and administrative expenses also included $251,100 of expense
in fiscal 98 for options granted to our president and CEO at below market
exercise prices, and $219,000 of expense for options granted to a third-party
principal shareholder, both of which were one-time, nonrecurring expenses.
General and administrative expenses as a percentage of sales were
approximately 82%, 66% and 33% for fiscal 97, fiscal 98 and fiscal 99,
respectively. The decline in general and administrative expenses as a percentage
of sales is the result of the absorption of startup costs in fiscal 97 and
fiscal 98, and the effects of economies of scale as well as better utilization
of our resources as sales increased.
Advertising expense increased from $36,202 in fiscal 97 to $307,380 for
fiscal 98 and $867,160 for fiscal 99. The increases in advertising expense were
primarily due to increased catalog production and distribution, which went from
$10,780 in fiscal 97 to $120,770 in fiscal 98 and $319,445 in fiscal 99, as well
as increased television advertising ($1,085 in fiscal 97 compared with $88,844
and $388,496 in fiscal 98 and fiscal 99, respectively).
Depreciation and amortization increased from $7,597 in fiscal 97 to
$57,081 and $96,779 in fiscal 98 and fiscal 99, respectively, as a result of
purchases of additional computer and office equipment to support our increased
levels of sales and personnel.
Other income (expense)
In February 1999 we purchased our current building. Interest expense
increased in fiscal 1999 as a result of the increase in related party borrowings
used to purchase this building. Other net, primarily consisted of nonrecurring
rental and marketing income.
19
<PAGE>
Income Taxes
We have had a cumulative net loss for the three year period that we
have been in business so we have not recorded any accruals for income taxes for
these periods. Also, we provided a valuation allowance against the deferred
income tax assets resulting from the underlying net operating loss
carryforwards.
Net Income (Loss)
We had net losses of $287,517 and $1,191,531 for fiscal 97 and fiscal
98, respectively. For fiscal 99, we had net income of $303,136. Due to the
$771,525 accretion for a beneficial conversion feature on preferred stock, there
was a net loss available to common stockholders of $468,389 for fiscal 99. The
accretion for beneficial conversion feature represents a non-recurring non-cash
charge that resulted from the issuance of Convertible Preferred Stock with a
common stock conversion price that was lower than our common stock market price
on the date of issuance.
Liquidity and Capital Resources
Our working capital at December 31, 1999 was $1,535,615, a decrease of
approximately 25% from March 31, 1999. The change in working capital is
attributable to an increase of $500,000 in borrowings under our line of credit,
which was used to repay the remaining balance then due on the related party note
payable, as well as approximately $345,000 of increases in capital lease
agreements as the result of the purchase of additional equipment. Net cash used
in operating activities decreased from $421,664 for the nine months ended
December 31, 1998 to $177,182 for the nine months ended December 31, 1999. This
was the result of a reduction of cash used for inventory purchases of $925,731,
as well as a non-cash charge of $140,000 related to the issuance of options in
connection with the settlement of litigation, which were offset by the operating
loss of $472,563 in the 1999 period. Net cash used in investing activities
increased from $257,849 for the nine months ended December 31, 1998 to $413,809
for the nine months ended December 31, 1999, as a result of purchases of
property and equipment to support the increased levels of sales. Net cash
provided by financing activities for the nine months ended December 31, 1999 was
$675,053 compared to $73,434 for the nine months ended December 31, 1998. This
increase was primarily attributable to proceeds from a mortgage on our operating
facilities, less repayments on the related party note payable, and borrowings
under our working capital line of credit.
We have primarily funded our operations through the private placement
of securities. During fiscal 97 and fiscal 98, we raised $1,216,541 of net
proceeds through the private placement of common stock. In April 1998, we raised
an additional $887,813 of net proceeds from the private placement of 250,000
shares of Convertible Preferred Stock, and in February 1999, we raised $819,167
of net proceeds from the sale of 330,333 shares of common stock. We have
financed major equipment acquisitions with capital leases, and as of December
31, 1999, we had outstanding lease commitments of $469,446.
20
<PAGE>
In March 1999, we purchased a 50,000 square foot building which houses
all of our administrative and operational personnel. In May 1999, we moved our
operations and executive offices to this location following a renovation of the
facility. The purchase was initially financed with an unsecured $1,950,000 loan
from the father of our president and CEO. In April 1999, we obtained a
$1,680,000 mortgage on the building from SouthTrust Bank and used the proceeds
to repay a portion of the original $1,950,000 loan. In September 1999, we
obtained a $1,000,000 line of credit from SouthTrust Bank. Borrowings under the
line of credit are limited to 40% of our eligible inventory value up to
$1,000,000. The line is secured by substantially all of our assets, and interest
is at the bank's base lending rate plus 1%, which equaled 9.5% at December 31,
1999. As of December 31, 1999, we have $500,000 outstanding under the line of
credit and used a portion of the proceeds to retire the remaining balance owed
on the original $1,950,000 used to purchase our operating facility. On February
24, 2000, we agreed to maintain $300,000 with SouthTrust Bank, as additional
collateral on the mortgage, in exchange for waivers/amendments to two financial
covenants. The requirement to maintain the funds expires no later than December
24, 2000. We believe that the Company generates sufficient working capital to
make the required payments under both the mortgage and line of credit, and that
this debt and the bank=s requirement to maintain additional collateral, will not
have a material affect on our financial position, results of operations or
liquidity in future periods.
Our sales are primarily paid for by credit cards for which we usually
receive cash settlement in two to three banking days. This minimizes our
accounts receivables balances relative to sales levels.
As described in this registration statement, we recently settled
administrative complaints against us in the states of Florida, Louisiana and
Alabama for allegedly failing to verify prescriptions. We paid a total of
$38,500 in fines and $7,671 in costs in these settlements. These settlements had
no material impact on our financial positions, results of operations or
liquidity.
As described in the registration statement, subject to obtaining
sufficient capital to fund the project, we anticipate that we will introduce
generic equivalents of various prescription and non-prescription pet
medications. This project is in the preliminary stage, and for the nine months
ended December 31, 1999 we have invested approximately $28,600 in this project.
These funds were provided from our general working capital. While we cannot
estimate at this time what the total cost of this project will be to us, we do
anticipate that this project will require substantial additional capital. As of
the date of this registration statement we do not have sufficient capital to
fund the project, and we have no binding commitments for additional capital to
fund it. We will not proceed with this project until such time as we have
sufficient capital to fund it. Accordingly, we cannot estimate at this time what
effect, if any, this project will have on our financial position, results of
operations and liquidity in the future.
We have been exploring opportunities to secure additional funding to
enable us to support our growth strategy. We are presently reviewing various
alternatives to raise additional working capital, including public, private
and/or institutional equity financings. As of the date of this registration
statement we have no binding commitments for additional capital. There can be no
assurances that any sources of funding will be available to us, or that any such
funding would be available at terms satisfactory to us. We believe that we can
continue to meet our financial obligations and to sustain revenue growth
utilizing cash generated from operations and proceeds from equipment leases and
from our working capital line of credit for at least the next twelve months.
Seasonality
Sales are seasonal since certain flea, tick and heartworm medications
are sold in greater quantities during the spring and summer months in the
northern United States.
21
<PAGE>
Year 2000 Compliance
We were aware of the issues associated with the programming code in
existing computer systems as the year 2000 approached. We reviewed all software
and hardware used internally by us in all support systems to determine whether
they were Year 2000 compliant. Our software had already been upgraded by the
manufacturer, or was recently purchased and was Year 2000 compliant. We also
installed the suppliers' Year 2000 upgrades to our accounting systems. The only
outside vendor upon which we relied, other than utility companies and similar
businesses, was the company which provides us with access to the Internet. This
company had previously informed us that its system was Year 2000 compliant.
Since January 1, 2000 we have experienced no disruptions in our systems or those
of third parties, or other computer related problems as a result of processing
dates beyond 1999. However, we cannot say with any certainty that we will not
experience any Year 2000 problems in the future.
The costs to us to in identifying and evaluating Year 2000 compliant
issues were not material. Most of our expenses have related to the upgrades or
replacements, when necessary, of software or hardware, as well as costs
associated with time spent by our employees in the evaluation process and Year
2000 compliance matters generally. These expenses were not material to our
financial position or results of operations.
ITEM 3. DESCRIPTION OF PROPERTY.
Our warehouse and distribution center and our principal executive
offices are housed in a 50,000 square foot building located in Pompano Beach,
Florida which we own. The building was purchased in March 1999, and carries a
seven year 7.75% mortgage with a commercial bank of in the original principal
amount of $1,680,000. The payments are based on a 20-year amortization of the
principal, with a seven year balloon payment due in May 2006. The one story
building sits on approximately 4.37 acres located in an office and industrial
park near Interstate 95, a major north/south corridor in Florida. We believe
that current zoning for this location would allow for a 20,000 square foot
expansion of this building, if required.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
On February 15, 2000 there were 6,369,822 shares of our common stock
issued and 6,250 shares of our Convertible Preferred Stock issued and
outstanding. Each share of Convertible Preferred Stock is convertible at the
holder=s option into 4.05 shares of our common stock. The following table sets
forth as of February 15, 2000 information as to the common stock ownership of:
- each of our directors, executive officers,
- all executive offices and directors as a group, and
22
<PAGE>
- all persons known by us who beneficially own more than 5% of our
common stock.
The following table also assumes the conversion of all 6,250 shares of our
Convertible Preferred Stock into 25,313 shares of our common stock. Unless
otherwise indicated, each person's address is 1441 SW 29 Avenue, Pompano Beach,
Florida 33069.
Name of Amount and Nature Percentage
Beneficial Owner of Beneficial Ownership of Class
-----------------------------------------------------------------------------
Marc Puleo, M.D. 2,935,250 37.6%
Christopher Lloyd 1,653,250 24.2%
Gian Fulgoni 25,000 *
Edward Bottum 0 n/a
William Weaver 0 n/a
George Garrick 0 n/a
Lynda Reitzenstein 450,000 7.0%
Marpul Trust 1,496,250 23.5%
Double Diamond Trading, Inc. 1,796,250 27.0%
Jeffrey Puleo 336,652 5.3%
All executive officers
and directors as a
group (six persons) 4,606,500 57.5%
- -------
* less than 1%
In the preceding table:
- Marpul Trust is a trust established by Dr. Puleo under an agreement
dated September 3,1999, in which 1,496,250 shares of our common stock owned by
him were deposited, and of which he is the beneficiary. Mr. Christopher Lloyd,
one of our officers and directors, and Southpac Trust International, Inc. are
trustees.
- Dr. Puleo=s holdings include:
- options held by him to purchase 300,000 shares of common stock at
$.163 per share until May 2002,
- options held by him to purchase 240,000 shares at $1.00 per share
until May 2002,
- options held by him to purchase 600,000 shares at $1.25 per share
until May 2003,
23
<PAGE>
- 1,496,250 shares owned by Double Diamond Trading Inc. over which
Dr. Puleo holds voting control until December 29, 2001, subject
to a two year extension upon the mutual consent of the parties,
under a voting proxy granted him on December 29, 1999, and
- options held by Double Diamond Trading to purchase 300,000 shares
at $.367 per share until May 2002. The stock underlying these
options are included in the voting proxy held by Dr. Puleo.
- The amount beneficially owned by Dr. Puleo excludes options to
purchase an additional 600,000 shares of our common stock at $1.25 per share
which have not yet vested under the terms of his employment agreement.
- The amount over which Mr. Lloyd has voting control includes 1,496,250
shares owned by Marpul trust of which Mr. Lloyd has shared voting power. Mr.
Lloyd=s holdings exclude options to purchase a total of 230,000 shares of common
stock at prices ranging from $2.25 to $4.50 per share which have not yet vested.
- Mr. Fulgoni=s holdings exclude options to purchase 60,000 shares of
our common stock at $6.125 per share which have not yet vested.
- Mr. Bottum=s holdings exclude options to purchase 60,000 shares of
our common stock at $6.125 per share which have not yet vested.
- Mr. Weaver=s holdings exclude options to purchase 60,000 shares of
our common stock at $6.125 per share which have not yet vested.
- Mr. Garrick=s holdings exclude options to purchase 60,000 shares of
our common stock at $4.00 per share which have not yet vested.
- Ms. Reitzenstein=s holdings include options to purchase 75,000 shares
of our common stock at $3.75 per share. Ms. Reitzenstein=s address is 5560 NE 33
Avenue, Fort Lauderdale, FL 33308.
- Double Diamond Trading=s holdings include options to purchase 300,000
shares of our common stock at $.367 per share until May 2002. The shares of our
common stock owned by Double Diamond Trading which are currently outstanding,
together with the shares which are issuable upon the exercise of these options
are included in the voting proxy held by Dr. Puleo. Mr. Ami Weitzman is the sole
officer, director and shareholder of Double Diamond Trading, Inc. and its
address is c/o Citco BVI Ltd., Post Office Box 662, Roadtown, Tortola, BWI.
- Mr. Puleo's address is 333 West Hubbard Street, Chicago, Illinois
60610. Mr. Puleo is Dr. Puleo=s brother.
24
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Directors and Executive Officers
Our directors and executive officers are as follows:
Name Age Positions Held
Marc Puleo, M.D. 35 Director, President, Chief Executive
Officer, Treasurer, Secretary and Director
Christopher Lloyd 33 Director and Chief Operating Officer
Gian Fulgoni 51 Director
Edward Bottum 65 Director
William Weaver 64 Director
George Garrick 46 Director
MARC PULEO, M.D. has served as our president, chief executive officer,
treasurer, secretary and a member of our board of directors since our inception
in January 1996. Dr. Puleo is also the president of South Florida Anesthesia
Professionals, Fort Lauderdale, Florida since founding the company in January
1996. From June 1997 until June 1998, Dr. Puleo was vice president of Dynamic
Press, Inc., an offset printing and direct marketing company. Dr. Puleo, an
anesthesiologist, was employed with Anesthesia Professional Association, North
Ridge Medical Center and North Ridge Outpatient Surgery Center from December
1994 through December 1995. From July 1991 through June 1994, Dr. Puleo was an
anesthesia resident with the University of Illinois Hospitals and Clinics, the
Michael Reese Hospital, the Westside Veteran's Administration Hospital, the
University of Illinois Eye and Ear Infirmary, the Nathan Cummings Surgicenter,
and the University of Illinois Pain Clinic, Chicago, Illinois. Dr. Puleo
received his medical degree from the University of Illinois College of Medicine,
Chicago, Illinois in June 1990.
CHRISTOPHER LLOYD has served on our board of directors since February 1998 and
as our chief operating officer since June 1999. From 1990 until joining
PetMedExpress, Mr. Lloyd was employed by Advocate Ravenswood Hospital Medical
Center, Chicago, Illinois, in a variety of senior management positions, serving
from 1996 until May 1999 as president of Ravenswood Health Enterprises and vice
president of Ravenswood Health Care Corporation where he was responsible for all
for-profit subsidiaries in an integrated hospital/ambulatory care network.
During 1988 and 1989, Mr. Lloyd was employed by St. Francis Hospital of
Evanston, Evanston, Illinois in the positions of both Administrative Fellow and
Assistant Administrator. Mr. Lloyd received a B.S. in Biology in 1986 and a M.S.
in Hospital and Healthcare Administration in 1988 from St. Louis University.
25
<PAGE>
GIAN FULGONI has been a member of our board of directors since August 1999.
Since November 1998, Mr. Fulgoni has been CEO of Lancaster Enterprises, LLC, an
investment firm which develops information technology to increase target
marketing in both the traditional and e-commerce sectors. From 1986 until
November 1998, Mr. Fulgoni was CEO of Information Resources, Inc. (Nasdaq
National Market: IRIC), a market research company which pioneered the use of
scanning data in the consumer package goods industry. Mr. Fulgoni continues to
serve on Information Resource's board of directors, a position he has held since
1981. Mr. Fulgoni has been a member of the board of directors of Platinum
Technology, Inc., a software company, since 1990, and a member of the board of
directors of Yesmail.com, Inc., a leading provider of comprehensive permission
mail direct marketing solutions, since March 1999.
EDWARD BOTTUM has been a member of our board of directors since August 1999. Mr.
Bottum is the retired vice chairman of Continental Bank Corporation (1959 to
1990). Since April 1990 he has been the managing director of Chase Franklin
Corporation, a merchant bank. Mr. Bottum also serves in a number of other
positions, including as a member of the board of directors of Kellwood Co.
(NYSE: KWD), a manufacturer and marketer of apparel and related soft goods,
since 1981; trustee of The Time Horizon Funds, a mutual fund family, since July
1995; the chairman of Learning Insights, Inc., a publisher of interactive
multimedia training products, since February 1996; trustee of Pacific
Innovations Trust, a mutual fund for variable annuities, since December 1996;
trustee of Underwriters Laboratories, Inc., a product safety certification
company, since May 1997; a member of the board of directors of CNA Income
Shares, Inc. (NYSE: CNN), a closed end fixed income fund, since April 1999; and
a member of the board of directors of Alleghany Asset Management, Inc., an asset
manager, since April 1999.
WILLIAM WEAVER has been a member of our board of directors since August 1999.
Mr. Weaver is a senior partner of the Chicago based law firm Sachnoff & Weaver,
Ltd., and manages the corporate securities section of the firm. Mr. Weaver
joined Sachnoff & Weaver, Ltd. in 1963. Mr. Weaver has been a member of the
board of directors of USFreightways Corporation (Nasdaq National Market: USFC),
a leading provider of transportation services and innovative logistics
solutions, since 1994, and a member of the board of directors of System Software
Associates, Inc. (Nasdaq National Market: SSAX), a leading provider of
cost-effective business enterprise solutions to the industrial sector worldwide,
since December 1986. Mr. Weaver also serves on the boards of directors of
several privately-held corporations.
GEORGE GARRICK has been a member of our board of directors since October 1999.
Since May 1998 Mr. Garrick has been the chairman, CEO and president of Flycast
Communications Corp. (Nasdaq National Market: FCST), a leading provider of
web-based direct response advertising solutions to advertisers. Prior to joining
Flycast, from September 1997 until May 1998, Mr. Garrick owned and operated his
own private venture and consulting company, G2 Ventures, Inc. From April 1997
until September 1997, Mr. Garrick served as Chief Marketing Officer for
PowerAgent, Inc., an Internet media and marketing company. From March 1996 until
April 1997, Mr. Garrick founded and operated
26
<PAGE>
NetROI LLC, an audience measurement software company. From November 1993 until
March 1996, Mr. Garrick served as the President and Chief Executive Officer of
Information Resources, Inc.-North America, a marketing measurement company.
Other than the period from July through October 1993, when Mr. Garrick served as
President and Chief Executive Officer of Nielsen Marketing Research U.S.A., a
unit of A.C. Nielsen Co., Mr. Garrick served Information Resources, Inc., a
market measurement company, in various capacities from 1981 until his departure
in March 1996. Mr. Garrick holds B.S. degrees in Mathematics and Engineering and
an M.S. degree in Management from Purdue University.
There is no family relationship between any of the executive officers
and directors. Each director is elected at our annual meeting of shareholders
and holds office until the next annual meeting of shareholders, or until his
successor is elected and qualified. The bylaws permit the board of directors to
fill any vacancy and such director may serve until the next annual meeting of
shareholders or until his successor is elected and qualified. Officers are
elected annually by the board of directors and their terms of office are at the
discretion of the board. Our officers devote full time to our business.
Committees of the board of directors
In October 1999, we established an Audit Committee of our board of
directors. The Audit Committee=s duties include the following, in addition to
such other duties as may be established from time to time by the board of
directors:
- the recommendation to the entire board of directors of the firm
to be employed as our independent public accountants,
- review the scope of the audit and audit fees,
- consulting with the independent auditors with regard to the plan
of audit, the audit report and the management letter, and
- conferring with the independent auditors with regard to the
adequacy of internal accounting controls, as appropriate, out of
the presence of management.
Messrs. Fulgoni, Bottum and Weaver are the members of the Audit
Committee.
A Technology Advisory Panel formed in April 1999 to provide advice to
our board on the implementation of our online strategies, and to assist us in
establishing strategic alliances was discontinued with the expansion of our
Board of Directors.
In January 2000, we established a compensation committee of the board
of directors. The compensation committee duties include:
- administering our 1998 Stock Option Plan, and
27
<PAGE>
- monitoring, reporting and recommending to the board of directors
on all matters concerning compensation and benefits of our
executive officers and senior staff.
The compensation committee consists of Messrs. Fulgoni and Bottum.
ITEM 6. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides a summary of cash and non-cash
compensation for each of the last three fiscal years ended March 31, 1999, 1998
and 1997 with respect to our following officers:
<TABLE>
<CAPTION>
Long - Term
Annual Compensation Compensation Awards
-------------------------------------------- -------------------
Options
Name and Other Annual Number of All Other
Principal Position Year Salary Bonus Compensation Shares Compensation
- ------------------ ---- ------ ----- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Marc Puleo 1999 -- -- -- 600,000 --
1998 -- -- -- 540,000 $251,000(a)
1997 -- -- -- -- --
</TABLE>
(a) represents the calculated value of the difference between the exercise price
and the market value on date of grant of options to purchase 300,000 shares.
During our fiscal years ended March 31, 1997, 1998 and 1999, and for the
nine months ended December 31, 1999 Dr. Puleo did not receive a cash salary as
compensation for his services to us. As described elsewhere in this registration
statement, Dr. Puleo=s compensation has been in the form of stock options. We
have, however, recognized an expense of $60,000, $70,000 and $80,000 for the
fiscal years ended March 31, 1997, 1998 and 1999, respectively, and an expense
of $75,000 for the nine months ended December 31, 1999 as the value of his
services to us. Please see Note 5 to the consolidated financial statements
included in this registration statement.
Option grants in last fiscal year
The following table sets forth certain information with respect to
stock options granted in fiscal 1999 to the named executive officers.
OPTION GRANTS IN YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------
No. of Securities % of Total Options
Underlying Granted to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price Date
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marc A. Puleo, M.D. 600,000 30.2% $1.25 May 2003
President, Chief
Executive Officer,
Director
</TABLE>
28
<PAGE>
Year end option table
During the fiscal year ended March 31, 1999 none of the named executive
officers exercised any options issued by PetMedExpress. The following table sets
forth information regarding stock options held as of March 31, 1999 by the named
executive officers.
AGGREGATE OPTION EXERCISES IN YEAR ENDED MARCH 31, 1999
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
No. of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money options at
Acquired on Value March 31, 1999 March 31, 1999
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Marc A. Puleo, -- -- 1,140,000 600,000 $5,943,500 $2,925,000
President, CEO
</TABLE>
Employment Agreements
In May 1998, we entered into a two year employment agreement with Dr.
Puleo to serve as its President and chief executive officer. Under the terms of
the employment agreement:
* Dr. Puleo received options to acquire an aggregate of 600,000 shares
of our common stock, exercisable until May 2003 at $1.25 per share, as
compensation for his services to us during this period,
* On the earlier of March 31, 2003 or the fiscal year in which we
report sales of at least $20,000,000 or income from operations of at least
$2,000,000 for any fiscal year on or before the fiscal year ending March 31,
2001, Dr. Puleo will receive a performance based bonus of five year options to
purchase up to an additional 600,000 shares of our common stock at $1.25 per
share,
* Dr. Puleo can participate in any profit-sharing or retirement plan
and in other employee benefits applicable to our employees and executives,
* We can terminate the employment of Dr. Puleo either with or without
good cause. If we terminate Dr. Puleo without cause, we are obligated to grant
Dr. Puleo the performance-based options provided we should thereafter meet the
stated criteria within the fiscal year in which Dr. Puleo was terminated. To the
extent that Dr. Puleo's employment is terminated for cause, no severance
benefits shall be paid.
29
<PAGE>
The employment agreement contains customary non-disclosure provisions,
as well as an 18 month non-compete following the termination of the agreement.
In January 2000, we entered into a two year employment agreement with
Christopher Lloyd, our chief operating officer. Under the terms of the
employment agreement:
* Mr. Lloyd receives an annual salary of $80,000, subject to increase
upon an annual review by our board of directors,
* Mr. Lloyd was granted options to acquire an aggregate of 350,000
shares of our common stock, at $2.75 per share, which vest at the rate of
150,000 options on date of the agreement, and 100,000 options on each of the
first and second annual anniversary date of the employment agreement. These
options are exercisable for five years from the date they vest,
* Mr. Lloyd can participate in any profit-sharing or retirement plan
and in other employee benefits applicable to our employees and executives and we
provide him with a car at our expense,
* We can terminate the employment of Mr. Lloyd either upon mutual
consent or for cause. If we should terminate Mr. Lloyd for cause, or if Mr.
Lloyd should terminate the agreement, no severance benefits shall be paid. If we
should terminate Mr. Lloyd without cause, we must give him three months notice
and continue to compensate him under the terms of this employment agreement
during those three months. At the end of the three month period, we must pay Mr.
Lloyd severance benefits in a lump sum equal to the balance of his base
compensation for the remainder of the term of the employment agreement, and his
executive benefits shall continue for the balance of the term of the agreement
and any previously granted but unvested options shall immediately vest.
* Mr. Lloyd is also entitled to terminate the employment agreement for
"good reason." The employment agreement provides that "good reason" includes if
we should:
- significantly change the nature or scope of his authorities,
powers, functions, duties or responsibilities, or fail to elect him
to the board of directors,
- materially breach any of the terms of the employment agreement,
- materially reduce his benefits if the reduction is not affected for
all our executive employees,
- if a successor company should fail to assume our obligations under
the agreement, or
30
<PAGE>
- if we should relocate our principal offices outside Broward or Palm
Beach counties Florida.
In the event of termination with good reason, Mr. Lloyd is entitled to
a lump sum equal to the balance of his base compensation for the remainder of
the term of the employment agreement, his benefits shall continue for the
remainder of the term of the agreement and any previously granted but unvested
options shall immediately vest.
* If we should terminate Mr. Lloyd=s agreement at or within 12 months
following a change in control of PetMedExpress, as defined in the employment
agreement, for any reason other than cause, we must pay him a lump sum equal to
the balance of his base compensation for the remainder of the term of the
employment agreement, his benefits shall continue for the remainder of the term
of the agreement and any previously granted but unvested options shall
immediately vest.
* The employment agreement contains customary non-disclosure
provisions, as well as an 18 month non-compete following the termination of the
agreement.
Directors Compensation
We have adopted a compensation policy for our outside directors, which
includes options are granted upon appointment under our 1998 Stock Option Plan
to purchase 60,000 shares of our common stock, exercisable at the fair market
value on the date of grant, to each outside director. These options vest at the
rate of 15,000 options on the first, second, third and fourth annual anniversary
date of the date of grant, provided that the individual remains a member of our
Board of Directors on the respective vesting date. The options also provide that
in the event of a sale of all or substantially all of our assets, or a merger,
stock exchange or other form of business combination, the result of which being
that our shareholders immediately preceding such transaction will own, after the
consummation of such business combination, less that 51% of our than issued and
outstanding voting securities, then, in such event, on the effective date of
either the sale of all or substantially all of our assets or a business
combination, all options not previously vested will immediately vest and become
exercisable.
We also provide directors and officers insurance coverage reimbursement
for all reasonable out-of-pocket expenses the outside director incurs in
attending our board of directors meetings.
Messrs. Fulgoni, Bottum, Weaver and Garrick are currently our outside
directors. In July 1999, when they joined our board, we granted each of Messrs.
Fulgoni, Bottum and Weaver 60,000 options, exercisable at $6.125 per share, as
compensation for their board service. In September 1999, upon joining our board,
we granted Mr. Garrick 60,000 options, exercisable at $4.00 per share, as
compensation for his board service.
31
<PAGE>
Members of our board of directors who are our executive officers do not
receive any additional compensation for their services to us in their capacity
as a member of our board of directors, other than coverage under our directors
and officers insurance policy.
1998 Stock Option Plan
The 1998 Stock Option Plan allows us to grant up to 3,000,000 options
to key employees, including officers, and to non-employee directors and
consultants. These options are intended to qualify either as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code, or as
nonstatutory stock options, which are options that are not intended to meet the
requirements of that section of the Internal Revenue Code.
The plan is administered by our board of directors. Under the plan, our
board of directors has the authority to determine:
- the persons to whom options will be granted,
- the number of shares to be covered by each option,
- whether the options granted are intended to be incentive stock
options,
- the manner of exercise, and
- the time, manner and form of payment upon exercise of an option.
Incentive stock options granted under the plan may not be granted at a
price less than the fair market value of our common stock on the date of grant
(or less than 110% of the fair market value in the case of employees holding 10%
or more of our voting stock). Nonstatutory options may be granted at an exercise
price established by our board of directors, but cannot be less than par value
per share ($.001) of our common stock. Incentive stock options granted under the
plan must expire not more than 10 years from the date of grant, and not more
than five years from the date of grant in the case of incentive options granted
to an employee who holds 10% or more of our voting stock.
As of February 15, 2000, options to purchase 2,090,400 shares of our
common stock, at exercise prices ranging from $1.25 to $6.50 per share, were
outstanding under our 1998 Stock Option Plan.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1997, Dr. Puleo was granted options to purchase 300,000 shares
of our common stock exercisable at $.167 per share until May 2002. Such options
were granted as additional consideration for the initial working capital of
approximately $110,000 provided to us by Dr. Puleo.
32
<PAGE>
In May 1997, we also granted options to Double Diamond Trading, Inc., a
principal shareholder, to purchase 300,000 shares of our common stock at $.367
per share exercisable until May 2002. Such options were granted as additional
consideration for initial working capital of approximately $90,000 provided to
us by Double Diamond Trading, Inc. Mr. Ami Weitzman is the sole officer,
director and shareholder of Double Diamond Trading, Inc. We granted the options
to Dr. Puleo at an exercise price lower than those granted to Double Diamond
Trading, Inc. in consideration of the $20,000 in additional initial working
capital provided to us by Dr. Puleo than that which was provided to us by Double
Diamond Trading, Inc.
In December 1998, Dr. Puleo advanced us $100,000 to be used as a
deposit on the purchase of the land and building which are now our principal
offices. The advance was repaid without interest in February 1999.
In February 1999, we borrowed $1,950,000 from the father of Dr. Puleo
to purchase the building and land we presently occupy as our principal offices.
The loan was unsecured and carried interest at 15% per annum. The note was
renewed as of March 31, 1999 for a two year period with an annual interest rate
of 15% for April 1999, and 12% thereafter. On May 30, 1999, $1,500,000 of the
note was repaid with the proceeds from a mortgage on the building and land
obtained by us from a commercial bank, and the balance was repaid in October
1999.
In April 1999, we purchased all of the issued and outstanding capital
stock of Southeastern Veterinary Exports, Inc., a Florida corporation, for
$1,000. Dr. Puleo was an officer of Southeastern Veterinary Exports, Inc. At the
time of purchase, Southeastern Veterinary Exports, Inc. had an immaterial amount
of assets and liabilities. We had previously utilized the services of
Southeastern Veterinary Exports, Inc. for purchasing purposes, and we did not
pay Southeastern Veterinary Exports, Inc. any commissions or mark-ups on the
products it purchased on our behalf.
We have purchased printing and mailing services from a company of which
Dr. Puleo served as vice president of marketing from June 1997 until June 1998.
For the fiscal years ended March 31, 1999 and 1998, we spent approximately
$97,856 and $17,819, respectively, for these printing and mailing services. We
did not use this company=s services during fiscal 1997 and discontinued their
services in late 1998. We believe the prices paid to this company were
approximately the same as or less than we would have paid from another third
party source.
ITEM 8. DESCRIPTION OF SECURITIES.
Our authorized capital consists of 20,000,000 shares of common stock,
par value $.001 per share, and 5,000,000 shares of preferred stock, par value
$.001 per share.
33
<PAGE>
Common Stock
Each outstanding share of common stock is entitled to one vote on all
matters submitted to a vote of the stockholders, including election of
directors. There is no cumulative voting in the election of directors. The
holders of outstanding shares of common stock are entitled to receive dividends
out of assets legally available for the payment of dividends, at a time, and in
amounts, as the board of directors may from time to time determine. The shares
of common stock are not convertible, and the holders have no preemptive or
subscription rights to purchase any securities of PetMedExpress. Upon
liquidation, dissolution or winding up of PetMedExpress, the holders of common
stock are entitled to receive pro rata the assets of PetMedExpress that are
legally available for distribution, after payment of all debts and other
liabilities.
Preferred Stock
Our board of directors is authorized, without further shareholder
approval, to issue from time to time up to an aggregate of 5,000,000 shares of
preferred stock in one or more series, and to fix or alter the designations,
rights, preferences and any qualification, limitations or restrictions of the
shares of each such series of preferred stock, including:
- the dividend rights,
- the dividend rates,
- conversion rights,
- voting rights,
- terms of redemption (including sinking fund provisions),
- redemption price or prices,
- liquidation preferences, and
- the number of shares constituting any series or designations of
a series.
As of the date of this registration statement, a series of 250,000
shares of Convertible Preferred has been authorized by the board of directors,
of which 6,250 shares remain unconverted and outstanding. The balance of these
shares of Convertible Preferred Stock have previously been converted into shares
of our common stock as provided by their terms. Therefore, 4,993,750 shares of
preferred stock remain without designation. We have no present plans to issue
any additional shares of preferred stock.
The designations, rights and preferences of the Convertible Preferred
provide that the shares
34
<PAGE>
- have full voting rights, share for share, with the then outstanding
common stock as well as any other series of preferred stock then
outstanding,
- are convertible into 4.05 shares of common stock at any time at the
option of the holder; provided, however, that the shares of
Convertible Preferred must be converted in whole Units of 5,000
shares,
- are not redeemable,
- pay dividends at the sole discretion of the board of directors, and
- in the event of our liquidation or winding up, carry a liquidation
preference equal to $4.00 per share, without interest.
Options and Warrants
Options
As of February 15, 2000, in addition to the options granted under our
1998 Stock Option Plan, we have outstanding options not under the 1998 Stock
Option Plan to purchase up to an additional 1,113,000 shares of common stock,
including:
- options granted to Dr. Puleo to purchase:
- 300,000 shares of common stock at $.163 per share until May
2002, and
- 240,000 shares of the common stock at $1.00 per share until May
2002, and
- options granted to a non-employee principal shareholder of
PetMedExpress to purchase 300,000 shares of common stock at $.367
per share until May 2002;
- options granted to various employees to purchase an aggregate of
199,500 shares of common stock at prices ranging from $1.15 to
$1.33 per share until July 2002; and
- options granted as compensation for services rendered to us to
purchase an aggregate of 103,500 shares of common stock at prices
ranging from $1.33 to $2.00 per share until July 2002. This
includes an option to purchase 22,500 shares at $1.33 per share
granted to an affiliate of Atlas, Pearlman, Trop & Borkson, P.A.,
counsel for PetMedExpress.
35
<PAGE>
Once vested, these options may be exercised from time to time by the
holders until their expiration date, and may be transferred at the discretion of
the holders. The options also contain customary anti-dilution provisions in the
event that we declare a stock split or stock dividend or that we otherwise
recapitalize PetMedExpress.
Warrants
In March 1998 we issued to Noble International Investments, Inc., a
broker-dealer who was serving as our investment bankers, a warrant to purchase
300,000 shares of common stock at $1.25 per share until May 2002. This warrant
was issued as compensation for one year of services rendered to us by Noble
under a two year investment advisory agreement which expired in March 1999.
The warrants may be exercised from time to time by the holders until
their expiration date, and may be transferred at the discretion of Noble. Noble
has transferred these warrants to three individuals, including two of its
principal shareholders. We granted the holders demand and piggy back
registration rights, and the warrants contain anti-dilution provisions in the
event:
- stock splits
- stock dividends
- if we make a general distribution to our common shareholders, other
than as part of our dissolution or liquidation or the winding up of its affairs,
of:
* any shares of our capital stock,
* any evidence of indebtedness, or
* any of our assets (other than cash, shares of common stock or
securities convertible into shares of common stock)
- if we offer rights or warrants to all holders of our common stock
which entitles them to subscribe to or purchase additional shares of our common
stock or securities convertible into shares of our common stock.
In November 1999, we issued a warrant to purchase 75,000 shares of our
common stock at $3.50 per share to a non-employee principal shareholder in
settlement of litigation. This three year warrant contains anti-dilution
provisions in the event of stock splits or stock dividends. We also granted the
holder of this warrant piggy-back registration rights
In November 1999, we also issued a warrant to purchase 75,000 shares of
our common stock at $3.75 per share to an NASD member firm as compensation for
financial advisory services it is rendering to us under a one year agreement.
This five year warrant contains anti-dilution provisions in the event of stock
splits, stock dividends and certain
36
<PAGE>
other events. We also granted the holder of this warrant demand and piggy-back
registration rights.
In the event we propose to register any shares of common stock under
the Securities Act of 1933, either for our own account or for the account of
other security holders, the warrant holders having piggyback registration rights
are entitled to receive notice of that registration, and are entitled to include
their shares in the registration. The demand registration rights allow the
warrant holders described above to request registration of all or any part of
their shares of common stock at any time prior to the expiration of the
registration rights.
In March 2000, we issued three year warrant B to purchase an aggregate
of 20,000 shares of our common stock at $3.125 per shares to the two principals
of Noble International Investments, Inc. as consideration for their waiver of
certain registration rights contained in the 300,000 warrants discussed above.
We are generally required to bear all of the expenses of these
registrations, except underwriting discounts and commissions. The registration
of any of the shares of common stock held by the warrant holders with
registration rights would result in these shares becoming freely tradeable
without restriction under the Securities Act of 1933 immediately upon
effectiveness of that registration statement
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT=S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
Our common stock was traded on the OTCBB under the symbol "PETS" from
September 16, 1997 until March 9, 2000. Since March 9, 2000, our common stock
has been quoted on the National Quotation Bureau Electronic Quotation Service
under the symbol PETS. The following table sets forth for the period indicated
the range of high and low closing sales prices per share of our common stock as
reported on the OTCBB.
High Low
---- ---
FISCAL 1998
Second Quarter $ 1.58 $ 1.25
Third Quarter $ 1.67 $ 1.33
Fourth Quarter $ 1.67 $ 1.25
FISCAL 1999
First Quarter $ 3.67 $ 1.33
Second Quarter $ 3.54 $ 2.75
Third Quarter $ 4.75 $ 2.71
Fourth Quarter $ 8.125 $ 3.50
FISCAL 2000
First Quarter $ 8.75 $ 6.125
Second Quarter $ 6.875 $ 4.375
Third Quarter $ 5.00 $ 2.50
37
<PAGE>
As of March 1, 2000, there were 52 holders of record of our common
stock. The closing sales price for the common stock on March 8, 2000 as
reported on the OTCBB was $3.00. We estimate there are in excess of 300
beneficial owners of our common stock.
A special note about penny stock rules
Our common stock is covered by an SEC rule that imposes additional
sales practice requirements on broker-dealers who sell such securities to
persons other than established customers and accredited investors, which are
generally institutions with assets in excess of $5,000,000, or individuals with
net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouse. For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and transaction prior to the sale. Consequently, the rule may affect the ability
of broker-dealers to sell our securities, and also may affect the ability of
purchasers of our stock to sell their shares in the secondary market. It may
also cause less broker-dealers to be willing to make a market in our common
stock, and it may affect the level of news coverage we receive.
Dividend Policy
The payment of dividends, if any, on either the Convertible Preferred
Stock or our common stock is solely at the discretion of our board of directors.
We have not declared or paid any dividends on either our Convertible Preferred
Stock or our common stock, and we do not currently intend to declare or pay cash
dividends in the foreseeable future. Our board of directors, in their sole
discretion, determines the payment of dividends, if any, after taking into
account various factors, including our financial condition, results of
operations, current and anticipated cash needs and plans for expansion.
ITEM 2. LEGAL PROCEEDINGS.
Various complaints were filed with the Florida Board of Pharmacy and
Florida Agency for Health Care Administration against PetMedExpress over the
course of 1997 and 1998. Those complaints, the vast majority of which were filed
by veterinarians who are in competition with us for the sale of pet prescription
products, alleged violations of the Florida Pharmacy Act related to our alleged
failure to verify prescriptions. By Order dated September 20, 1999, the Florida
Board of Pharmacy approved a settlement of (i) all pending complaints and (ii)
all future complaints relating to the alleged failure to verify prescriptions
prior to September 20, 1999. Under the terms of the settlement, we paid the
Florida Board of Pharmacy $7,671 for expenses and costs and a fine of $32,500.
On October 8, 1999, the Louisiana Board of Pharmacy issued an official
appearance notice summoning PetMedExpress to appear at an administrative
hearing. We were charged with allegedly dispensing pet medications without
obtaining authorization from the veterinarian or an authorized member of his or
her staff in violation of Louisiana
38
<PAGE>
state law. The charges, which we contested, were precipitated by a public
complaint filed by a veterinarian. The formal hearing has been continued to an
unspecified date. By consent agreement dated February 8, 2000, the Louisiana
Board of Pharmacy and PetMedExpress resolved the charges. We paid $3,000 to the
Louisiana Board of Pharmacy for administrative costs and expenses of the
investigation.
On October 12, 1999, the Alabama State Board of Pharmacy issued to
PetMedExpress a statement of charges and notice of hearing. The three count
statement of charges alleged that we violated Alabama state law by allegedly
dispensing or refilling pet medications without the prescription of a licensed
practitioner or authorization of the prescriber. The charges, which
PetMedExpress contested, were precipitated by complaints filed with the Alabama
Board of Veterinary Medicine by three veterinarians. In February 2000, the
Alabama State Board of Pharmacy and PetMedExpress agreed to a consent order
resolving the matters at issue. The consent order provided that PetMedExpress=
permit shall be placed on probation for a period of two years, subject to our
compliance with the following:
- we must implement and follow enhanced written policies and
procedures,
- our pharmacy manager must attend a yearly continuing education
course in Alabama pharmacy law,
- we must submit written reports to the Board on a quarterly basis
documentation our continuing compliance with applicable rules and
regulations in Alabama, and
- we must comply with applicable laws and regulations.
The consent order also required us to pay an administrative fine of $3,000.
In July 1999, the FDA issued a warning letter to PetMedExpress
regarding an unspecified instance or instances where we allegedly dispensed
prescription veterinary drugs without obtaining a lawful written or oral order
from a licensed veterinarian within the course of the veterinarian=s
professional practice. We deny any alleged violation. The matter was
subsequently referred to the FDA=s Center for Veterinary Medicine. The warning
letter did not assert any claim for damages. We submitted a written response to
the warning letter indicating that we reviewed our internal procedures which
related to the warning letter, and we believe we are in compliance with all
applicable rules and regulations.
In February 2000, the EPA issued a Stop Sale, Use or Removal Order to
us regarding the alleged distribution or sale of a misbranded medication in
violation of the Federal Insecticide, Fungicide, and Rodenticide Act, as
amended. The order provides that we shall not distribute, sell, use or remove
the products listed in the order which are allegedly misbranded. The order
further provides that we shall not commence any sale or distribution of those
products without the prior written approval of the EPA. We deny any
39
<PAGE>
alleged violation. The order did not assert any claim for damages. We submitted
a written response to the order indicating that we reviewed our internal
procedures which related to the order and we believe we are in compliance with
all applicable rules and regulations.
Except as described above, we are not a party to any pending legal
proceeding the resolution of which, our management believes, would have a
material adverse effect on our results of operations or financial condition, nor
to any other pending legal proceedings other than ordinary, routine litigation
incidental to our business.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Keefe, McCullough & Co. served as our independent auditor from March
1997 to March 1999. We dismissed Keefe, McCullough & Co. as our independent
auditor on March 31, 1999 because our board of directors wanted to engage a
national accounting firm. During the period that Keefe, McCullough & Co. were
our independent auditors there were no disagreements with Keefe, McCullough &
Co. on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure. No accountants= report on the
financial statements of PetMedExpress issued by Keefe, McCullough & Co.
contained an adverse opinion or a disclaimer of opinion, or was qualified or
modified as to uncertainty, audit scope or accounting principles. Keefe,
McCullough & Co. continues to perform tax services and non-audit related
advisory services for us.
On April 7, 1999 we engaged Ernst & Young, LLP as our independent
auditor for the fiscal year ended March 31, 1999. The decision to change audit
firms was approved by our Board of Directors.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
In May 1997, we granted Dr. Puleo options to purchase 300,000 shares of
our common stock exercisable at $.163 per share until May 2002. Such options
were granted as additional consideration for the initial working capital of
approximately $110,000 in cash provided to us by Dr. Puleo. In May 1997, we also
granted options to Double Diamond Trading, Inc., a principal shareholder, to
purchase 300,000 shares of our common stock at $.367 per share exercisable until
May 2002. Such options were granted as additional consideration for initial
working capital of approximately $90,000 in cash provided to us by Double
Diamond Trading, Inc. Mr. Ami Weitzman is the sole officer, director and
shareholder of Double Diamond Trading, Inc. Both Dr. Puleo and Double Diamond
Trading, Inc., including Mr. Weitzman, are accredited investors and these
options were granted under an exemption from registration under the Securities
Act of 1933 in reliance on Section 4(2) of the act. These options remain
unexercised.
In May 1997, PetMedExpress sold an aggregate of 777,749 shares of its
common stock at $1.00 per share on a "best efforts" basis in a private
placement. This private placement was exempt from registration under the
Securities Act of 1933 in reliance on Sections 4(2) or 3(b) of such act, and
Rule 504 of Regulation D. This offering was made
40
<PAGE>
to accredited or otherwise qualified investors who met the suitability standards
set forth in the private offering memorandum. Investors who were not accredited
investors had full access to, or were otherwise provided with, all relevant
information reasonably necessary to evaluate PetMedExpress. None of these
investors were our affiliates. We received a total of $777,749 in gross proceeds
from this offering and paid sales commissions to broker-dealers who were NASD
members totaling $77,775.
In May 1997, we granted an option to purchase an aggregate of 240,000
shares of common stock at an exercise price of $1.00 per share to an unrelated
entity in exchange for operational consulting services valued at $62,400. In
March 1998, we issued Noble International Investments, Inc., an NASD member firm
a warrant to purchase 300,000 shares of common stock at an exercise price of
$1.25 per share in exchange for financial consulting services valued at $60,000.
The recipients were accredited investors, and the securities were issued under
an exemption from registration under the Securities Act of 1933 in reliance on
Section 4(2) of the act. The option was exercised in May 1999, and the warrant
remains unexercised.
In January 1998, PetMedExpress issued 27,000 shares of common stock to
three key employees as a bonus for services. These employees were
sophisticated investors and had full access to, or were otherwise provided with,
all relevant information reasonably necessary to evaluate PetMedExpress. These
shares were returned to the Company and canceled in March 1998.
In April 1998, we sold an aggregate of 250,000 shares of our
Convertible Preferred Stock to a group of accredited or otherwise sophisticated
investors in a private placement exempt from registration under the Securities
Act of 1933 in reliance on Section 4(2) and Regulation D, Rule 505, at a sale
price of $4.00 per share on a "best efforts" basis. The sophisticated investors
had full access to, or were otherwise provided with, all relevant information
reasonably necessary to evaluate PetMedExpress. None of these investors were our
affiliates. Each share of Convertible Preferred is convertible, at the option of
the holder, into 4.05 shares of common stock. Noble International Investments,
Inc., an NASD member firm, acted as placement agent in the offering and as
compensation therefore received a commission equal to 10% of the sales made by
it, or an aggregate of $99,750, and a non-accountable expense allowance equal to
3% of the sales made by it, or an aggregate of $29,925. An aggregate of 243,750
shares of Convertible Preferred Stock were converted into common stock as of the
date of this registration statement and 6,250 shares are outstanding.
In April 1998, we issued an option to purchase an aggregate of 103,500
shares of our common stock to a group of two individuals and three law firms as
compensation for services rendered to PetMedExpress. None of these recipients
are our affiliates. These services, which included legal services, printing
services, and rent, were valued at $99,360. The options are exercisable at an
average exercise price of $1.55 per share, and were issued under an exemption
from registration under the Securities Act of 1933 in reliance on Section 4(2)
of that act. These individuals and entities accredited or otherwise qualified
investors who had full access to, or were otherwise provided with, all relevant
information reasonably necessary to evaluate PetMedExpress.
41
<PAGE>
In May 1998, PetMedExpress issued an aggregate of 9,801 shares of its
common stock to certain key employees as a bonus . We valued these shares at
$22,672. These employees were sophisticated investors and had full access to, or
were otherwise provided with, all relevant information reasonably necessary to
evaluate PetMedExpress.
In May 1998, we also issued 6,000 shares of common stock as
compensation for legal services preformed for PetMedExpress. These services were
valued at $38,800. The recipient was an accredited investor and the issuance was
exempt from registration under the Securities Act of 1933 in reliance on Section
4(2) of that act.
In February 1999, we sold an aggregate of 333,333 shares of its common
stock at $3.00 per share on a "best efforts" basis in a private placement,
resulting in gross proceeds of $999,999. This private placement was exempt from
registration under the Securities Act of 1933 in reliance on Sections 4(2) or
3(b) of such act, and Rule 504 of Regulation D. This offering was made to
accredited investors. Double Diamond Trading, Inc., one of our principal
shareholders, purchased shares in this offering on the same terms and conditions
as all of the other investors. With the exception of Double Diamond Trading,
Inc., none of the investors were our affiliates. Noble received a selling
commission equal to 10% of the gross proceeds of the offering, or an aggregate
of $99,999.
In November 1999, we issued a warrant to purchase 75,000 shares of our
common stock at $3.50 per share to a non-employee principal shareholder in
settlement of litigation. The recipient was a sophisticated investor who had
full access to, or was otherwise provided with, all relevant information
reasonably necessary to evaluate PetMedExpress. We valued these warrants at
$140,000. This issuance was exempt from registration under the Securities Act of
1933 in reliance on Section 4(2) of such act.
In November 1999, we issued a warrant to purchase 75,000 shares of our
common stock at $3.75 per share to an NASD member firm for financial advisory
services under a one year agreement. We valued these warrants at $189,750. This
issuance was exempt from registration under the Securities Act of 1933 in
reliance on Section 4(2) of such act.
In March 2000, we issued three year warrants to purchase an aggregate
of 20,000 shares of our common stock at $3.125 per share to the two principals
of Noble International Investments, Inc. in consideration of their waiver of
certain registration rights contained in the 30,000 warrants discussed above.
The recipients are accredited investors, and the issuance was exempt from
registration under the Securities Act of 1933 in reliance on Section 4(2) of
such act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Florida Business Corporation Act permits the indemnification of
directors, employees, officers and agents of Florida corporations. The Company's
Articles of Incorporation and Bylaws provide that the Company shall indemnify
its directors and officers to the fullest extent permitted by the Corporation
Act. Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
42
<PAGE>
ITEM 1. INDEX TO EXHIBITS.
Exhibit
Number Description Page
----
3.1 Amended and Restated Articles of Incorporation(1)
3.2 By-Laws(1)
4.1 Form of Warrant issued to Noble International Investments, Inc.(1)
4.2 Specimen common stock certificate(1)
10.1 Amended and Restated Employment Agreement with Marc A. Puleo(1)
10.2 Employment Agreement with Chris Lloyd(1)
10.3 1998 Stock Option Plan(1)
10.4 Loan and Security Agreement dated September 17, 1999 by and between
the Company and Southtrust Bank, National Association(1)
10.5 Promissory Note for $1,000,000 from the Company to Southtrust Bank,
National Association dated September 17, 1999(1)
10.6 Proxy from Double Diamond Trading, Inc. to Marc Puleo(1)
10.7 Security Agreement dated September 17, 1999 by and between the
Company and Southtrust Bank, National Association(1)
10.8 Florida Real Estate Mortgage, Assignment of Leases and Rents and
Security Agreement dated April 29, 1999 by and between the Company
and Southtrust Bank, National Association(1)
10.9 Mortgage Modification Agreement dated September 17, 1999 by and
between the Company, Marc A. Puleo and Southtrust Bank, National
Association(1)
10.10 Promissory Note for $1,680,000 from the Company to Southtrust Bank,
National Association dated April 29, 1999(1)
10.11 Promissory Note for $1,950,000 to Philip Puleo(1)
10.12 Letter Agreements with South Trust Bank, N.A.(1)
10.13 Professional Services Agreement(1)
16 Letter from Keefe, McCullough & Co. regarding change in certifying
accountants(1)
21 Subsidiaries of the registrant(1)
27 Financial Data Schedule(2)
(1) previously filed
(2) filed herewith
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
PetMedExpress.com, Inc.
By: /s/ Marc A. Puleo, M.D.
--------------------------------------------
Marc A. Puleo, M.D., Chief Executive Officer and
President
Date: February 25, 2000
44
<PAGE>
Consolidated Financial Statements
PetMedExpress.com, Inc.
and Subsidiary
Years ended March 31, 1997, 1998 and 1999 and
nine months ended December 31, 1998 (unaudited)
and December 31, 1999
with Report of Independent Auditors
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Consolidated Financial Statements
Years ended March 31, 1997, 1998 and 1999 and
nine months ended December 31, 1998 (unaudited) and December 31, 1999
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors....................................................................................F-1
Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1998 and 1999 and
December 31, 1999..............................................................................................F-2
Consolidated Statements of Operations for the years ended March 31,
1997, 1998 and 1999 and for the nine months ended December 31,
1998 (unaudited) and 1999......................................................................................F-3
Consolidated Statement of Changes in Stockholders' Equity for the
years ended March 31, 1997, 1998 and 1999 and for the nine months
ended December 31, 1999........................................................................................F-4
Consolidated Statements of Cash Flows for the years ended March 31,
1997, 1998 and 1999 and for the nine months ended December 31,
1998 (unaudited) and 1999......................................................................................F-5
Notes to Consolidated Financial Statements........................................................................F-7
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors
PetMedExpress.com, Inc.
and Subsidiary
We have audited the accompanying consolidated balance sheet of
PetMedExpress.com, Inc. and subsidiary as of March 31, 1999 and December 31,
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year and nine months then ended, respectively.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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
PetMedExpress.com, Inc. and subsidiary at March 31, 1999 and December 31, 1999,
and the results of its operations and its cash flows for the year and nine
months then ended, respectively, in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
West Palm Beach, Florida
February 4, 2000, except for Note 4,
as to which the date is February 24, 2000
F-1
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31 December 31
1998 1999 1999
-------------------------------- ------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 771,584 $ 685,749 $ 769,811
Accounts receivable, less allowance for
doubtful accounts of $5,489, $3,849 and
$140,183 as of March 31, 1998, 1999 and
December 31, 1999, respectively 295,250 314,691 121,574
Inventories 468,697 1,576,713 1,940,533
Income taxes receivable -- -- 96,365
Prepaid expenses and other current assets 118,275 94,281 116,254
-------------------------------- ------------
Total current assets 1,653,806 2,671,434 3,044,537
Property and equipment, net 244,508 2,862,267 3,286,449
Other assets, net 68,195 95,170 62,501
-------------------------------- ------------
Total assets $1,966,509 $5,628,871 $6,393,487
================================ ============
March 31 December 31
1998 1999 1999
-------------------------------- ------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 299,218 $ 438,247 $ 421,803
Line of credit -- -- 500,000
Current portion of capital lease obligations 19,817 9,828 355,093
Current portion of mortgage payable -- -- 64,229
Accrued expenses 193,118 185,627 357,547
Stock subscription deposits 799,290 -- --
----------------------------- ---------------
Total current liabilities 1,311,443 633,702 1,698,672
Deferred membership fee revenue 174,528 327,529 286,838
Capital lease obligations, less current portion 20,545 6,699 114,353
Note payable to related party -- 1,950,000 --
Mortgage payable, less current portion -- -- 1,583,248
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized; 6,250 convertible shares issued and
outstanding at March 31, 1999 and December 31, 1999
with a liquidation preference of $4 per share -- 22,246 22,246
Common stock, $.001 par value, 20,000,000 shares
authorized; 4,787,499, 6,120,822 and 6,369,822 shares
issued and outstanding at March 31, 1998, 1999 and
December 31, 1999, respectively 4,787 6,121 6,370
Additional paid-in capital 1,934,254 3,858,486 4,519,985
Unearned warrants issued for future services -- -- (189,750)
Accumulated deficit (1,479,048) (1,175,912) (1,648,475)
----------------------------- ---------------
Total stockholders' equity 459,993 2,710,941 2,710,376
----------------------------- ---------------
Total liabilities and stockholders' equity $ 1,966,509 $ 5,628,871 $ 6,393,487
============================= ===============
</TABLE>
See accompanying notes.
F-2
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine months ended
Year ended March 31 December 31
1997 1998 1999 1998 1999
----------------------------------------------- -----------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Sales $ 602,191 $ 3,493,534 $ 10,224,178 $ 7,629,262 $ 11,597,084
Cost of sales 350,538 2,037,876 5,646,187 4,142,409 6,181,656
----------------------------------------------- -----------------------------
Gross profit 251,653 1,455,658 4,577,991 3,486,853 5,415,428
----------------------------------------------- -----------------------------
Operating expenses:
General and administrative 492,873 2,309,498 3,386,641 2,439,167 4,316,622
Advertising 36,202 307,380 867,160 566,779 1,141,328
Depreciation and amortization 7,597 57,081 96,779 67,350 254,637
----------------------------------------------- -----------------------------
Total operating expenses 536,672 2,673,959 4,350,580 3,073,296 5,712,587
----------------------------------------------- -----------------------------
Income (loss) from operations (285,019) (1,218,301) 227,411 413,557 (297,159)
Other income (expense):
Interest expense (2,498) (5,934) (57,714) (3,936) (181,703)
Interest income -- 9,512 15,577 10,545 23,812
Other, net -- 23,192 117,862 92,386 (17,513)
----------------------------------------------- -----------------------------
Income (loss) before provision for
income taxes (287,517) (1,191,531) 303,136 512,552 (472,563)
Provision for income taxes -- -- -- -- --
----------------------------------------------- -----------------------------
Net income (loss) (287,517) (1,191,531) 303,136 512,552 (472,563)
Accretion for beneficial conversion
feature of preferred stock -- -- 771,525 771,525 --
----------------------------------------------- -----------------------------
Net loss available to common
stockholders $ (287,517) $ (1,191,531) $ (468,389) $ (258,973) $ (472,563)
=============================================== =============================
Basic and diluted loss per common
share $ (0.07) $ (0.27) $ (0.09) $ (0.05) $ (0.07)
=============================================== =============================
Weighted average number of common
share outstanding 4,009,500 4,494,054 5,333,355 5,148,774 6,369,822
=============================================== =============================
</TABLE>
See accompanying notes.
F-3
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Convertible Common
Preferred Stock Stock
----------------------------------------------------------
Shares Amount Shares Amount
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1996 -- $ -- -- $ --
Sale of common stock -- -- 4,009,750 4,010
In-kind contribution of services -- -- -- --
Net loss -- -- -- --
-----------------------------------------------------------
Balance at March 31, 1997 -- -- 4,009,750 4,010
Sale of common stock, less issuance costs
of $23,765 -- -- 777,749 777
Issuance of stock options at below market price -- -- -- --
Issuance of stock options in exchange for services -- -- -- --
In-kind contribution of services -- -- -- --
Net loss -- -- -- --
-----------------------------------------------------------
Balance at March 31, 1998 -- -- 4,787,499 4,787
Sale of convertible preferred stock, net of 250,000 116,288 -- --
issuance costs
Accretion for beneficial conversion feature of
preferred stock -- 771,525 -- --
Conversion of convertible preferred stock into
common stock (243,750) (865,567) 987,189 987
Sale of common stock, net of issuance costs -- -- 318,333 319
Issuance of common stock in exchange for services -- -- 6,000 6
Issuance of common stock in exchange for software -- -- 12,000 12
Issuance of common stock in exchange for employee
services -- -- 9,801 10
Issuance of stock options in exchange for services -- -- -- --
In-kind contribution of services -- -- -- --
Net income -- -- -- --
-----------------------------------------------------------
Balance at March 31, 1999 6,250 22,246 6,120,822 6,121
Exercise of stock options -- -- 246,000 246
Issuance of options in settlement of litigation -- -- -- --
Issuance of warrants in exchange for prepaid
services -- -- -- --
Sale of common stock -- -- 3,000 3
In-kind contribution of services -- -- -- --
Net loss -- -- -- --
-----------------------------------------------------------
Balance at December 31, 1999 6,250 $ 22,246 6,369,822 $ 6,370
===========================================================
</TABLE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Additional Unearned Warrants
Paid-In issued for future Accumulated
Capital services Deficit Total
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at April 1, 1996 $ -- -- $ -- $ --
Sale of common stock 458,047 -- -- 462,057
In-kind contribution of services 60,000 -- -- 60,000
Net loss -- -- (287,517) (287,517)
----------------------------------------------------------------
Balance at March 31, 1997 518,047 -- (287,517) 234,540
Sale of common stock, less issuance costs
of $23,765 753,707 -- -- 754,484
Issuance of stock options at below market price 470,100 -- -- 470,100
Issuance of stock options in exchange for services 122,400 -- -- 122,400
In-kind contribution of services 70,000 -- -- 70,000
Net loss -- -- (1,191,531) (1,191,531)
----------------------------------------------------------------
Balance at March 31, 1998 1,934,254 -- (1,479,048) 459,993
Sale of convertible preferred stock, net of 771,525 -- -- 887,813
issuance costs
Accretion for beneficial conversion feature of
preferred stock (771,525) -- -- --
Conversion of convertible preferred stock into
common stock 864,580 -- -- --
Sale of common stock, net of issuance costs 782,848 -- -- 783,167
Issuance of common stock in exchange for services 38,794 -- -- 38,800
Issuance of common stock in exchange for software 35,988 -- -- 36,000
Issuance of common stock in exchange for employee
services 22,662 -- -- 22,672
Issuance of stock options in exchange for services 99,360 -- -- 99,360
In-kind contribution of services 80,000 -- -- 80,000
Net income -- -- 303,136 303,136
----------------------------------------------------------------
Balance at March 31, 1999 3,858,486 -- (1,175,912) 2,710,941
Exercise of stock options 247,752 -- -- 247,998
Issuance of options in settlement of litigation 140,000 -- -- 140,000
Issuance of warrants in exchange for prepaid
services 189,750 (189,750) -- --
Sale of common stock 8,997 -- -- 9,000
In-kind contribution of services 75,000 -- -- 75,000
Net loss -- -- (472,563) (472,563)
----------------------------------------------------------------
Balance at December 31, 1999 $ 4,519,985 (189,750) $(1,648,475) $ 2,710,376
================================================================
</TABLE>
See accompanying notes
F-4
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended
Year ended March 31 December 31
1997 1998 1999 1998 1999
--------------------------------------------- ----------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (287,517) $(1,191,531) $ 303,136 $ 512,552 $ (472,563)
Adjustments to reconcile net income
Depreciation 7,517 54,334 87,434 59,221 210,917
Amortization 80 2,747 9,345 8,129 43,720
Amortization of deferred
membership fee revenue -- (31,117) (427,871) (394,397) (440,858)
Provision for doubtful accounts -- 5,489 1,640 1,640 167,052
Issuance of stock options in
settlement of litigation -- -- -- -- 140,000
In-kind contribution of services 60,000 70,000 80,000 60,000 75,000
Issuance of common stock and
options in exchange for services -- 592,500 138,160 138,160 --
Issuance of common stock in
exchange for employee services -- -- 22,672 22,672 --
Changes in operating assets and
liabilities:
Accounts receivable (7,748) (292,991) (21,081) 111,141 26,065
Inventories (109,068) (359,629) (1,108,016) (1,289,551) (363,820)
Prepaid expenses and other
current assets (11,241) (107,034) 23,994 (11,123) (21,973)
Income taxes receivable -- -- -- -- (96,365)
Accounts payable 56,431 242,787 139,029 (159,331) (16,444)
Accrued expenses and taxes 9,965 183,154 (7,491) (3,391) 171,920
Deferred membership fee revenue -- 205,645 580,872 522,614 400,167
--------------------------------------------- ----------------------------
Net cash used in operating activities (281,581) (625,646) (178,177) (421,664) (177,182)
--------------------------------------------- ----------------------------
Cash flows from investing activities
Purchases of property and equipment (73,085) (169,728) (2,669,192) (65,179) (402,758)
Other assets (5,304) (65,773) (36,321) (192,670) (11,051)
--------------------------------------------- ----------------------------
Net cash used in investing activities (78,389) (235,501) (2,705,513) (257,849) (413,809)
--------------------------------------------- ----------------------------
</TABLE>
Continued on next page.
F-5
<PAGE>
<TABLE>
<CAPTION>
PetMedExpress.com, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
Nine months ended
Year ended March 31 December 31
1997 1998 1999 1998 1999
------------------------------------------- ---------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities
Net proceeds from sale of common stock $462,056 $ 754,538 $ 783,167 - 8,999
Exercise of stock options - - - - 247,999
Proceeds from sale of convertible
preferred stock - - 88,523 88,523 -
Payments on capital lease obligations (8,038) (15,145) (23,835) (15,089) (21,789)
Borrowings under line of credit
agreement - - - - 500,000
Payments on mortgage payable - - - - (32,523)
Borrowings (repayments) under note
payable to related party - - 1,950,000 - (1,950,000)
Proceeds from mortgage payable - - - - 1,680,000
Stock subscription deposits - 799,290 - - -
Proceeds from capital lease
obligations - - - - 242,367
------------------------------------------- ---------------------------------
Net cash provided by financing activities 454,018 1,538,683 2,797,855 73,434 675,053
------------------------------------------- ---------------------------------
Net increase (decrease) in cash and cash
equivalents 94,048 677,536 (85,835) (606,079) 84,062
Cash and cash equivalents at beginning
of fiscal year - 94,048 771,584 771,584 685,749
------------------------------------------- ---------------------------------
Cash and cash equivalents at end of
fiscal year $ 94,048 $ 771,584 $ 685,749 $ 165,505 $ 769,811
=========================================== =================================
Supplemental disclosure of cash flow
information
Cash paid for interest $ 4,498 $ 5,934 $ 57,714 $ 3,936 $ 152,692
=========================================== =================================
Cash paid for income taxes $ - $ - $ 97,000 $ - $ -
=========================================== =================================
Supplemental disclosures of noncash
financing activities
Issuance of common stock in
exchange for software $ - $ - $ 36,000 $ - $ -
=========================================== =================================
Equipment purchased through capital
lease obligations $ - $ - $ - $ - $ 223,284
=========================================== =================================
Warrants issued in exchange for prepaid
services $ - $ - $ - $ - $ 189,750
=========================================== =================================
Preferred stock issued to subscription
receivable holders $ - $ - $ 799,290 $ - $ -
=========================================== =================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1999
1. Summary of Significant Accounting Policies
Organization
PetMedExpress.com, Inc. and subsidiary (the Company) is a direct marketer of
household pet medications and other pet products and is located in the Ft.
Lauderdale, Florida area. The Company distributes catalogs to its customers and
potential customers and takes orders by telephone, internet and mail. Almost all
of the Company's sales are to residents of the United States.
During April 1999, the Company acquired at nominal cost the outstanding common
stock of an affiliate which had an immaterial amount of assets and liabilities.
The Company had previously utilized the services of the affiliate for purchasing
purposes.
The unaudited financial statements and information contained herein for the
period indicated have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with accounting principles
generally accepted in the United States for interim financial information.
Accordingly, they do not include all of the information and notes required by
accounting principles generally accepted in the United States, for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal, recurring adjustments) considered necessary for a fair presentation
have been included.
The Company's fiscal year end is March 31. References herein to fiscal 1997,
1998 or 1999 refer to the Company's fiscal years ended March 31, 1997, 1998 and
1999, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of PetMedExpress.com,
Inc. and its wholly-owned subsidiary. All significant intercompany transactions
have been eliminated in consolidation.
Revenue Recognition and Deferred Membership Fee Revenue
Product sales are recognized upon shipment. Deferred membership revenue consists
of cash collected on the sale of one and three-year memberships. Membership fees
are amortized to income ratably over the membership period. Outbound shipping
and handling fees are included in sales upon shipment.
F-7
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Inventories
Inventories are priced at the lower of cost or market value using a weighted
average cost method.
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. Furniture,
fixtures, equipment and computer software are depreciated over periods ranging
from five to seven years. The building is being depreciated over 25 years.
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 comparison of the carrying amount of the
asset to net future cash flows expected to be generated from the asset. No
impairment has been recognized in the accompanying financial statements.
F-8
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Research and Development
The Company contracted with a pharmaceutical research firm to develop generic
forms of certain of the Company's pet medication product offerings. Costs
related to the development of these items have been expensed as incurred.
During the nine months ended December 31, 1999, the Company incurred
approximately $28,600 of research and developments costs, which are included in
general and administrative expenses in the accompanying consolidated statement
of operations. No such costs were incurred in fiscal 1997, 1998 or 1999.
Advertising
The Company's advertising expense consists primarily of television advertising
and catalog production costs. Television costs are expensed as the ads are
televised and catalog costs are expensed when the related catalogs are
distributed or superseded. Advertising expense for fiscal 1997, 1998 and 1999
and for the nine months ended December 31, 1999 was $36,202, $307,380, $867,160
and $1,141,328, respectively.
Accounting for Stock Based Compensation
The Company accounts for employee stock options using the intrinsic value method
as prescribed by Accounting Principles Board Opinion No.25 Accounting for Stock
Issued to Employees. The Company follows the disclosure provisions of Statement
of Financial Accounting Standard No. 123, Accounting for Stock Based
Compensation and for valuing common stock equivalents issued to nonemployees.
Significant Risks and Uncertainties--Product Supply
Two multi-national pharmaceutical companies which manufacture, among other
products, heartworm medication and flea and tick control products, two of the
best selling products of the Company, have refused to sell these items directly
to the Company. Therefore, the Company must obtain its inventory of these items
through cooperating wholesale sources. To the extent that the Company is unable
to purchase these products from other sources or if they can only be purchased
at prices which make their resale uncompetitive in the marketplace, it could
have a
F-9
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
materially adverse impact on the Company's sales. However, the multi-national
company's patent for the heartworm medication expired in June 1999 and the
Company, as well as a number of other manufacturers, are planning to produce
generic forms of this medication.
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 mortgage payable, line
of credit and capital lease obligations approximate fair value as their interest
rates approximate current market rates.
Comprehensive Income
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which
requires that all items that are recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The items of
other comprehensive income that are typically required to be displayed are
foreign currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain investments in debt and equity securities. There
were no items of other comprehensive income for any periods presented herein.
Income Taxes
The company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes. Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
F-10
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designed as part of a
hedge transaction and, if it is, the type of hedge transaction. The Company does
not expect that the adoption of SFAS No. 133 will have a material impact on its
financial statements because the Company does not currently hold any derivative
instruments.
2. Property and Equipment
Major classifications of property and equipment are as follows:
<TABLE>
<CAPTION>
March 31 December 31
1998 1999 1999
------------------------------------------------------
<S> <C> <C> <C>
Land $ - $ 863,758 $ 863,758
Building - 1,057,588 1,371,547
Computer software 166,555 195,221 393,609
Furniture, fixtures and equipment 76,258 128,866 431,162
Equipment and software under capital leases 63,545 63,545 586,573
Projects in process - 702,572 -
------------------------------------------------------
306,358 3,011,550 3,646,649
Less accumulated depreciation 61,850 149,283 360,200
------------------------------------------------------
$ 244,508 $ 2,862,267 $ 3,286,449
======================================================
</TABLE>
Projects in process at March 31, 1999, consists of computer software and
furniture, fixtures and equipment which were acquired by the Company in March
1999 but could not be placed in service until the Company completed the move to
its new headquarters in June 1999. These items were transferred to the
appropriate fixed asset category during the nine months ended December 31, 1999.
F-11
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Property and Equipment (continued)
Amortization expense for equipment under capital leases was $2,553, $21,898,
$15,637 and $78,242 for fiscal 1997, 1998 and 1999 and the nine months ended
December 31, 1999, respectively.
3. Capital Leases
The Company leases equipment under capital lease agreements with outside third
parties. At December 31, 1999, the Company had not made certain scheduled
payments under one of the capital lease agreements as a result of a dispute with
the lease holder. Approximately $114,000 of capital lease obligations which are
scheduled for payment in periods beyond December 31, 2000 have been classified
as a current liability, in the accompanying balance sheet and in the schedule
below, as a result of the Company not making scheduled payments under the
related capital lease agreement. Future payments under capital leases with
initial terms of one year or more consisted of the following at December 31,
1999:
<TABLE>
<CAPTION>
Year ended December 31:
<S> <C> <C>
2000 $413,287
2001 97,297
2002 21,108
2003 5,277
-------------------
536,969
Amount representing interest 67,523
-------------------
469,446
Less current portion 355,093
-------------------
$114,353
===================
</TABLE>
4. Mortgage Payable and Line of Credit Agreement
On April 30, 1999, the Company entered into a $1,680,000 mortgage agreement with
SouthTrust Bank for the building and land which are used as the Company's
headquarters and warehouse. The mortgage is for a seven year period with 20 year
amortization and bears annual interest of 7.75%. The building and land have been
pledged as collateral for the mortgage, which is also personally guaranteed by
the President and CEO of the Company. Mortgage proceeds of $1,500,000 were used
to reduce the note due to the father of the President and CEO (see Note 8).
F-12
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. Mortgage Payable and Line of Credit Agreement (continued)
Future payments due under the mortgage payable consisted of the following at
December 31, 1999:
<TABLE>
<CAPTION>
Year ended December 31:
<S> <C> <C>
2000 $ 64,229
2001 69,099
2002 74,729
2003 80,817
2004 87,093
Thereafter 1,271,510
-------------------
$1,647,477
===================
</TABLE>
In September 1999, the Company entered into a $1,000,000 line of credit
agreement with SouthTrust Bank . Borrowings under the line of credit are limited
to 40% of the value of the Company's eligible inventory and accrue interest at
the lending institution's base rate plus 1% (9.5% at December 31, 1999). The
line of credit is secured by substantially all the assets of the Company. At
December 31, 1999, $500,000 was outstanding under the line of credit agreement.
Both the line of credit and mortgage payable contain various financial and
operating covenants.
On February 24, 2000, the Company agreed to maintain $300,000 with SouthTrust
Bank, as additional collateral on the mortgage and line of credit, in exchange
for waivers/amendments to two financial covenants. The waivers/amendments
reduced the Company's working capital ratio requirement from $2 million to $1
million as well as suspending the fixed charge coverage ratio requirement for
the period December 31, 1999 through January 1, 2001, respectively. Had these
waivers not been obtained, the Company would have been in default of its
mortgage and line of credit at December 31, 1999. The restriction to maintain
these funds expires no later than December 24, 2000.
5. Stockholders' Equity
Fiscal 1999
Effective February 24, 1999, the Company declared a three for one stock split of
its common stock. All common stock and stock option data in these financial
statements have been adjusted to give retroactive effect to the stock split.
In February 1999, the Company completed a private placement of 333,333 shares of
common stock at a price of $3.00 per share, less issuance costs of $180,832.
Issuance costs of $120,000
F-13
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. Stockholders' Equity (continued)
were satisfied as part of the offering in exchange for 40,000 shares valued at
the offering price of $3.00 per share. In addition, as part of this offering the
Company accepted computer software instead of cash in exchange for 12,000 shares
valued at the offering price of $3.00 per share. As of December 31, 1999, all
333,333 shares of this offering had been issued.
In May 1998, the Company issued 9,801 shares of common stock to certain key
employees as compensation for services. Compensation expense of $22,672 was
recorded in connection with these transactions.
In Fiscal 1999, the Company issued 6,000 shares of common stock in exchange for
legal services valued at $38,800 which were performed on behalf of the Company.
The Company used the estimated value of the services performed to record the
fair value of the above transaction.
Preferred Stock
In April 1998, the Company issued 250,000 shares of its $.001 par value
preferred stock at a price of $4.00 per share, less issuance costs of $112,187.
Each share of the preferred stock is convertible into approximately 4.05 shares
of common stock at the election of the shareholder. The preferred stock was
recorded at $887,813, net of the value of the beneficial conversion feature of
$771,525. The value of the beneficial conversion feature was computed as the
difference between the closing market price of the Company's common stock ($1.75
per share) and the conversion price of the preferred stock ($.988 per share) on
the date the preferred stock was sold. This amount was immediately recognized as
a reduction to net income available to common stockholders. The shares have a
liquidation value of $4.00 per share and may pay dividends at the sole
discretion of the Company. The Company does not anticipate paying dividends to
the preferred shareholders in the foreseeable future. Each share of preferred
stock is entitled to one vote on all matters submitted to a vote of shareholders
of the Company. As of December 31, 1999, 6,250 shares of the convertible
preferred stock remained unconverted and outstanding.
In-Kind Contribution of Services
During fiscal years 1997, 1998 and 1999 and the nine months ended December 31,
1999, the Company's President and Chief Executive Officer (CEO) did not receive
a salary for services
F-14
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. Stockholders' Equity (continued)
performed on behalf of the Company. The Company does not intend to pay the
President and CEO for his past services but has recorded compensation expense
for these contributed services with an offsetting increase in additional
paid-in-capital. Several factors were considered in estimating the amount of
contributed services including, the level and type of services provided as well
as the amount of compensation received by other senior executives of the
Company.
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 fiscal 1999 income
tax provision includes the use of a net operating loss carryforward of $218,684
which was fully reserved for by a valuation allowance at March 31, 1998.
Significant components of the Company's net deferred income taxes are as
follows:
<TABLE>
<CAPTION>
Nine months ended
Years ended March 31 December 31
1998 1999 1999
------------------------------------ -------------------
<S> <C> <C> <C>
Deferred tax assets:
Depreciation $ 1,395 $ - $ -
Allowance for bad debts - 1,448 52,751
Deferred compensation (stock options) 219,674 254,881 231,400
Amortization of intangible assets - 751 5,806
Other 38,000 37,630 58,695
Net operating loss carryforward 255,545 72,145 731,437
------------------------------------ -------------------
Deferred tax assets 514,614 366,855 1,080,089
Less valuation allowance (514,614) (357,663) (1,033,473)
------------------------------------ -------------------
Total deferred tax assets - 9,192 46,616
Deferred tax liabilities:
Depreciation - (9,192) (46,616)
------------------------------------ -------------------
Total net deferred taxes $ - $ - $ -
==================================== ===================
</TABLE>
F-15
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
Management has determined that a $1,033,473 valuation allowance is necessary at
December 31, 1999 since it is unable to conclude based on present circumstances
that it is more likely than not that the deferred tax asset will be realized.
The change in valuation allowance for the nine months ended December 31, 1999 is
$675,810. At December 31, 1999, the Company had net operating loss carryforwards
of $1,944,000, of which $1,412,000 relate to the exercise of stock options which
will result in an adjustment to equity when the benefit is realized. The net
operating loss carryforwards expire in the years 2013 through 2019.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is as follows:
<TABLE>
<CAPTION>
Year ended March 31 Nine months ended
December 31
1997 1998 1999 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax at U.S. statutory rates $(79,831) $(381,321) $130,266 $(160,671)
State income taxes, net of federal tax
benefit (7,633) (40,574) 14,657 (64,994)
Tax deduction from exercise of stock
options - - - (480,079)
Nondeductible items 334 1,285 7,017 29,934
Change in valuation allowance 89,288 425,326 (156,951) 675,810
Other (2,158) (4,716) 5,011 -
--------------------------------------------------------------------
$ - $ - $ - $ -
====================================================================
</TABLE>
7. Stock Options
Stock Options Granted to Employees
The Company established the 1998 Stock Option Plan (the Plan) effective July 31,
1998, which provides for the issuance of qualified options to officers,
directors and key employees, and nonqualified options to consultants and other
service providers. The Company has reserved 3,000,000 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
F-16
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Stock Options (continued)
common stock as of the date of issuance. The Company had 1,667,900 options
outstanding under the Plan at December 31, 1999. Options issued prior to July
31, 1998 are not included in the Plan.
The weighted average fair value per share of options granted by the Company in
fiscal 1998 and 1999 and the nine months ended December 31, 1999 was $.56, $1.03
and $2.83, respectively. There were no options issued or outstanding during
fiscal 1997.
A summary of the status of stock options issued by the Company, together with
changes during the periods indicated, is presented in the following table.
<TABLE>
<CAPTION>
Nine months ended
Fiscal 1998 Fiscal 1999 December 31, 1999
--------------------------------------------------------------------------------------
Weighted Weighted
Average Weighted Average
Exercise Average Exercise
Number Price Per Number Exercise Price Number Price Per
of Shares Share of Shares Per Share of Shares Share
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period - $ - 1,410,000 $0.746 3,113,400 $1.222
Granted 1,410,000 0.746 2,093,400 1.315 554,000 4.60
Exercised - - - - 246,000 1.01
Canceled - - 390,000 2.736 190,500 3.33
--------------------------------------------------------------------------------------
Outstanding at end of period 1,410,000 $0.746 3,113,400 $1.222 3,230,900 $ 1.71
======================================================================================
Exercisable at end of period 1,410,000 $0.746 2,212,500 $0.996 2,121,450 $ 0.99
======================================================================================
</TABLE>
F-17
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Stock Options (continued)
The following table sets forth additional information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted Average
Range of Number Outstanding as Remaining Contractual Weighted Average Number Exercisable as
Exercise Prices of December 31, 1999 Life Exercise Price of December 31, 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$0.16 - $2.00 2,613,000 2.91 years $1.02 1,940,850
$2.38 - $4.50 430,900 4.69 years $5.65 178,600
$6.13 - $6.50 187,000 9.38 years $6.14 2,000
------------------------ 3.52 years ------------------------
3,230,900 2,121,450
</TABLE>
The value of all options granted during fiscal 1998 and 1999 and the nine months
ended December 31, 1999, computed using the Black-Scholes option pricing model
as prescribed by SFAS No. 123 and the weighted average assumptions as follows.
There were no options issued or outstanding during fiscal 1997.
<TABLE>
<CAPTION>
Nine months ended
Year ended March 31 December 31
1998 1999 1999
--------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 6.00% 6.00% 6.00%
Expected dividend yield 0.00% 0.00% 0.00%
Expected lives 1-5 1-5 1-5
Expected volatility .781 .779 .787
</TABLE>
Adjustments are made for options forfeited prior to vesting.
F-18
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Stock Options (continued)
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the options' vesting period. The pro forma information
follows:
<TABLE>
<CAPTION>
Nine months ended
Year ended March 31 December 31
1998 1999 1999
----------------------------------- -------------------
<S> <C> <C> <C>
Pro forma net loss $(1,262,212) $ (835,229) $(795,341)
Accretion for beneficial conversion
feature of preferred stock -- (771,525) --
----------------------------------- -------------------
Pro forma net loss available to common
stockholders $(1,262,212) $ (1,606,754) (795,341)
=================================== ===================
Pro forma net loss per common share
$ (.28) $ (.30) $ (.12)
=================================== ===================
</TABLE>
Stock Options and Warrants Granted in Exchange for Services
During fiscal 1998, the Company granted 240,000 options and 300,000 warrants to
purchase shares of common stock at exercise prices of $1.00 per share and $1.25
per share, respectively, in exchange for financial and operational consulting
services. The options and warrants were valued at $122,400 of which the Company
recognized $67,400 in fiscal 1998 and $55,000 in fiscal 1999 as a general and
administrative expense in the accompanying statements of operations. The options
and warrants vest immediately and expire in fiscal 2002 and 2003. During the
nine months ended December 31, 1999, the 240,000 options were exercised.
During fiscal 1999, the Company granted options and warrants to purchase 103,500
shares of common stock at an average exercise price of $1.55 per share in
exchange for legal and printing services and rent. These services were valued at
$99,360 and recorded as a general and administrative expense in the accompanying
statements of operations. The options and warrants vest immediately and expire
in fiscal 2003.
F-19
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Stock Options (continued)
In November 1999, the Company issued warrants to purchase 75,000 shares of the
Company's common stock to a former shareholder in settlement of litigation. The
warrants are exercisable at $3.50 per share at any time prior to November 1,
2002. The Company valued the warrants at $140,000 in accordance with SFAS 123.
The expense related to this settlement is included in general and administrative
expenses in the accompanying statement of operations.
During the nine months ended December 31, 1999, the Company granted warrants to
purchase 75,000 shares of its common stock to an investment advisory firm in
exchange for services related to future equity transactions. The warrants are
exercisable at $3.75 per share at any time prior to November 12, 2004. The
Company valued the warrants at $189,750 in accordance with SFAS 123 and has
recorded this amount as a contra-equity item at December 31, 1999. Such amount
will offset any equity proceeds raised by the investment advisory firm or, in
the event no equity is raised, will be expensed accordingly.
Stock Options Granted at Below Market Price
In fiscal 1998, options to purchase 300,000 shares of the Company's common stock
were granted to the Company's President and CEO as additional consideration for
the initial working capital provided by him to the Company. The options were
granted on May 6, 1997 at an exercise price of $0.163 per share while the market
value of the common stock at that time was estimated by the Company to be $1.00
per share. As prescribed under APB No. 25, the Company recorded as expense the
difference between the option exercise price and the market value of the
Company's common stock on the date of grant. Such expense amounted to $251,100
and was included in general and administrative expense in fiscal 1998. In
addition, in fiscal 1998 the Company granted 300,000 options to an outside party
at an exercise price of $.367 per share. In accordance with SFAS No. 123 the
Company computed the fair value of these options as $219,000 and recognized such
amount as expense in fiscal 1998. The above options vest immediately and expire
on May 6, 2002.
8. Related Party Transactions
In February 1999, the Company borrowed $1,950,000 from the father of the
Company's President & CEO to purchase a building and land to be used as the
Company's headquarters. The loan was unsecured and carried interest at 15% per
annum. The note was renewed as of
F-20
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. Related Party Transactions (continued)
March 31, 1999 for a two year period with an annual interest rate of 15% for
April 1999, and 12%, thereafter. The note was partially repaid on May 30, 1999,
in the amount of $1,500,000 with proceeds from the mortgage on the building and
land and the remaining $450,000 balance was repaid in October 1999 with proceeds
from borrowings on the Company's Line of Credit. The Company paid interest on
the note of $52,890 and $48,894 during fiscal 1999 and the nine months ended
December 31, 1999, respectively.
The President and CEO of the Company is the sole owner of South Florida
Anesthesia Professionals (SFAP) which rents space in the Company's facilities.
SFAP paid rent to the Company of $2,400 and $6,000 and $4,500 for fiscal 1998
and 1999 and the nine months ended December 31, 1999, respectively. SFAP did not
rent space from the Company in fiscal 1997.
The Company purchases printing and mailing services from Dynamic
Marketing/Press, Inc. The President and CEO of the Company was vice president of
marketing of that company from June 1997 to June 1998. Amounts paid to Dynamic
Marketing/Press, Inc. for fiscal 1998 and 1999 and the nine months ended
December 31, 1999 were $17,819, $97,856 and $0, respectively. No amounts were
paid to Dynamic Marketing/Press, Inc. in fiscal 1997.
9. Earnings Per Share
The Company adopted SFAS No. 128, Earnings per Share, effective March 31, 1998.
In accordance with the requirements of SFAS No. 128, basic earnings per share is
computed by dividing net income by the weighted average number of shares
outstanding and diluted earnings per share reflects the dilutive effects of
stock options (as calculated utilizing the treasury stock method) and the
equivalent common shares of outstanding convertible preferred stock. Options
were not included for fiscal 1997, 1998 and 1999 and the nine months ended
December 31, 1999 because their effect would have been anti-dilutive.
F-21
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. Valuation and Qualifying Amounts
Activity in the Company's Valuation and Qualifying accounts consists of the
following:
<TABLE>
<CAPTION>
Nine months ended
Year ended March 31 December 31
1997 1998 1999 1998 1999
------------------------------------------- ------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Balance at beginning of period $ - $ - $ 5,489 $ 5,489 $ 3,849
Provision for doubtful accounts - 5,489 1,640 1,640 167,052
Write-offs of uncollectible accounts
receivable - - (3,280) (3,280) (30,718)
------------------------------------------- ------------------------------
Balance at end of period $ - $ 5,489 $ 3,849 3,849 $140,183
=========================================== ==============================
Valuation allowance for deferred
tax assets:
Balance at beginning of period $ - $ 89,288 $ 514,614 $ 514,614 $357,663
Additions 89,288 425,326 - - 675,810
Deductions - - (156,951) (156,951) -
------------------------------------------- ------------------------------
Balance at end of period $ 89,288 $ 514,614 $ 357,663 $357,663 $1,033,473
=========================================== ==============================
</TABLE>
11. Commitments and Contingencies
During the nine months ended December 31, 1999, complaints were filed against
the Company by three states in which the Company is licensed to dispense pet
medications. In February 2000, the complaints which were filed by the states
were settled for fines of $38,500 and costs of $7,671. In July 1999, the U.S.
Food and Drug Administration (FDA) issued a warning letter to PetMedExpress
regarding an unspecified instance where the company allegedly dispensed
prescription veterinary drugs without obtaining a lawful written or oral order
from a licensed veterinarian within the course of the veterinarian's
professional practice. In February 2000, the U.S. Environmental Protection
Agency (EPA) issued a Stop Sale, Use or Removal Order to the Company regarding
the alleged distribution or sale of misbranded medication in violation of the
Federal Insecticide, Fungicide and Rodenticide Act, as amended. The FDA and EPA
have not asserted claims for damages or penalties. The Company has submitted
written responses to both the letter and the order indicating that the company
reviewed its internal procedures relating to the matters raised by these
regulatory agencies and the Company believes that it is in compliance with all
applicable rules and regulations.
Employment Agreements
In April 1998, the Company entered into an employment agreement with its
President and Chief Executive Officer. The agreement expires in April 2000 and
contains provisions for non-disclosure, severance and benefits, the granting of
options, all of which had been granted as of December 31, 1999 and included in
Note 7 and provides for an eighteen month non-compete following termination of
the agreement.
F-22
<PAGE>
PetMedExpress.com, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
In January 2000, the Company entered into an employment agreement with its Chief
Operating Officer. The agreement expires in January 2002 and contains provisions
for non-disclosure, severance and benefits, the granting of 350,000 options at
$2.75 per share (the market price on date of grant) and provides for an eighteen
month non-compete following termination of the agreement.
12. Impact of Year 2000 (Unaudited)
The Year 2000 issue is the result of certain computer programs being written
using two digits rather than four to define the applicable year. Any computer
programs that have time sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. Since January 1, 2000, the Company has
experienced no disruption in its systems or those of third parties, or other
computer related problems as a result of processing dates beyond 1999. However,
there can be no assurances that the Company will not experience Year 2000
related problems in the future.
F-23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 769,811
<SECURITIES> 0
<RECEIVABLES> 261,757
<ALLOWANCES> 140,183
<INVENTORY> 1,940,533
<CURRENT-ASSETS> 3,044,537
<PP&E> 3,286,449
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,393,487
<CURRENT-LIABILITIES> 1,698,672
<BONDS> 0
0
0
<COMMON> 28,616
<OTHER-SE> 2,681,760
<TOTAL-LIABILITY-AND-EQUITY> 6,393,487
<SALES> 11,597,084
<TOTAL-REVENUES> 11,597,084
<CGS> 6,181,656
<TOTAL-COSTS> 5,712,587
<OTHER-EXPENSES> 6,299
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 181,703
<INCOME-PRETAX> (472,653)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (472,563)
<EPS-BASIC> (0.07)
<EPS-DILUTED> 0
</TABLE>
