U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) - March 31, 2000
PETMED EXPRESS, INC.
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(Exact name of registrant as specified in its charter)
Florida 000-28827 65-0680967
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1441 S.W. 29 Avenue, Pompano Beach, Florida 33069
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(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code 954-979-5995
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Securities registered under Section 12(b) of the Exchange Act:
none
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(Title of each class)
Name of each exchange on which registered
not applicable
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements
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incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X]
State issuer's revenues for its most recent fiscal year. $ 14,677,146 for
the 12 months ended March 31, 2000.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. The aggregate market value of the voting stock held by non-affiliates
computed at the closing price of the Company's common stock on July 7, 2000 is
approximately $3,503,430.
State the number of shares outstanding of each of the issuer's class of
common equity, as of the latest practicable date. As of July 7, 2000, 6,385,010
shares of common stock are issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) of
the Securities Act of 1933 ("Securities Act"). Not Applicable.
Transitional Small Business Disclosure Form (check one):
Yes No X
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TABLE OF CONTENTS
PETMED EXPRESS, INC. - FORM 10-KSB ANNUAL REPORT
FISCAL YEAR ENDED MARCH 31, 2000
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Item. Page No.
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Part 1
Item 1. Business...............................................................................................1
Item 2. Description of Property...............................................................................24
Item 3. Legal Proceedings.....................................................................................24
Item 4. Submission of Matters to a Vote of Security Holders...................................................27
Part II
Item 5. Market for Common Equity and Related Stockholder Matters..............................................27
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................................................29
Item 7. Financial Statements..................................................................................34
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure............................................................................34
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...................................................35
Item 10. Executive Compensation.................................................................................39
Item 11. Security Ownership of Certain Beneficial Owners and Management.........................................46
Item 12. Certain Relationships and Related Transactions........................................................ 49
Part IV
Item 13. Exhibits and Reports on Form 8-K.......................................................................50
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This discussion in this annual report regarding PetMed Express and our
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 our beliefs, as well as
assumptions we have used based upon information currently available to us.
Because these statements reflect our current views concerning future events,
these statements involve risks, uncertainties and assumptions. Actual future
results may differ significantly from the results discussed in the
forward-looking statements. A reader, whether investing in our common stock or
not, should not place undue reliance on these forward-looking statements, which
apply only as of the date of this annual report.
When used in this annual report on Form 10-KSB, "PetMed Express,",
"we," "our," and "us" refers to PetMed Express, Inc. and our subsidiary
Southeastern Veterinary Exports, Inc.
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PART I
Item 1. Business
General
We are the leading nationwide pet pharmacy. We market prescription and
non- prescription pet medications, health and nutritional supplements and
accessories at discounted prices through the PetMed Express catalog,
telemarketing sales representatives and on the Internet through our web site at
www.petmedexpress.com. Our nationwide pet pharmacy and multi-channel approach
provides attractive values for our retail and wholesale customers, including:
- convenience;
- costs savings;
- superior customer service;
- enhanced shopping flexibility;
- ease of ordering and reordering; and
- rapid home delivery.
Our fiscal year end is March 31 and our executive offices are located
at 1441 SW 29 Avenue, Pompano Beach, Florida 33069, telephone number is
954-979-5995. Our web site is located at www.petmedexpress.com The information
contained on this web site is not part of this annual report.
Our Products
We offer a broad selection of products for dogs and cats. These
products include a majority of the well-known brands of medication, such as
Sentinel(R), Heartgard(R), Revolution(R) and Advantage(R). Generally, our prices
are discounted from the prices for medications charged by veterinarians or the
prices for accessories at traditional retail stores.
We continuously research new products introduced at industry trade
shows, and regularly select new products or the latest generation of existing
products to become part of our product selection. In addition, we also
continuously refine our current products to respond to changing consumer
purchasing habits. Our web site is designed to give us the flexibility to change
featured products or promotions. Our enhanced web site will also allow us to
adjust our featured products in response to new seasons or upcoming holidays, as
well as to introduce or test special promotions.
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Current Products
Our product line provides customers with a wide variety of selections
across the most popular categories for dogs and cats. Our current products
include:
- Prescription Medications: Heartworm tablets, antibiotics,
anti- inflammatory medications and medications for chronic
diseases, such as arthritis and thyroid conditions;
- Non-Prescription Medications: A majority of the well-known
flea and tick control products;
- Health and Nutritional Supplements: Daily vitamins for
nutritional balance; and
- Accessories: Hygiene products, treats, toys, beds, collars and
travel aids.
The following table provides a breakdown of the percentage of our total
sales contributed by each category during the indicated periods:
Year Ended March 31,
1997 1998 1999 2000
---- ---- ---- ----
Prescription medications 33% 35% 28% 26%
Non-prescription
medications 60 50 54 56
Health and
nutritional supplements 0 2 3 3
Accessories 0 5 4 3
Memberships, shipping
charges and other 7 8 11 12
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Total: 100% 100% 100% 100%
Development of Private Label Products
We are currently working to broaden and diversify our product selection
through the introduction of private label generic medications, health and
nutritional supplements and accessories. We believe this strategy will allow us
to increase our profit margins, build brand awareness and offer additional value
to our customers. We are currently in the preliminary stages of negotiations
with third-party manufacturers for the development of these private label
products. We do not intend to manufacture any of these products internally.
We intend to introduce a line of private label health and nutritional
supplements, such as daily vitamins, chewable treats and dog bones containing
vitamins and other nutrients. Our private label accessories for dogs and cats
may include medicated
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shampoos for a variety of skin conditions and rawhide chews. 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. Although there is no assurance, we currently anticipate our
line of private label health and nutritional supplements and accessories will be
launched sometime after fiscal 2001. We are unable to estimate at this time the
date Heartshield may be introduced to the market, if ever.
Patents for various popular pet medications have, and will continue, to
expire. Currently, there are no generic versions of the popular medications,
such as heartworm medication and flea and tick control products, in part because
there is no price competition between veterinarians who currently account for a
vast majority of sales of these products. We recognize that the development and
approval processes for these products are high risk ventures, requiring a
significant commitment by us in both management as well as other time and
financial resources. To date, we have not invested significant funds in the
development of our private label products. We cannot estimate at this time what
the total cost of this project will be.
Sales
We offer our products through three main sales channels, including the
PetMed Express catalog, our telemarketing sales representatives and on the
Internet through our web site. We have designed both our catalog and web site to
provide a convenient, cost-effective and informative shopping experience that
encourages consumers to purchase products important for a pet's health and
quality of life. We believe that these multiple channels allow us to increase
the visibility of our brand name and provide customers with increased shopping
flexibility and service.
The PetMed Express Catalog
The PetMed Express catalog is a full-color seasonal catalog organized
by category that features approximately 2,400 products. The catalog is produced
by a combination of in-house writers and production artists as well as
independent contractors. We generally produce three catalogs a year. We mail
catalogs to our existing customer base, as well as in response to requests
generated from our advertising, direct mail and telemarketing campaigns. During
fiscal 2000, we mailed a total of approximately one million catalogs to
approximately 450,000 individuals. In fiscal 2000, we published three issues of
our catalog, including a separate seasonal gift and accessory catalog for the
holiday season.
Telemarketing
We have utilized telemarketing as a sales tool since we began
operations in 1997. In July 1999, we completed our new call center. We currently
employ approximately 35 sales representatives. Our sales representatives receive
and process
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inbound customer orders, and facilitate our outbound telemarketing campaigns.
Our telephone system is equipped with a predictive dialer which gives us the
ability to efficiently utilize our sales representatives' time. Utilizing the
efficiencies of shift scheduling, our call center could accommodate up to 300
sales representatives, on a three-shift, 100 sales representatives per shift
basis. Our sales representatives receive a base salary and are incentivized with
cash bonuses and gift certificates.
Pets generally require refills of their medications between every four
to six months. We design our telemarketing campaigns around maximizing
customers' reorders on a consistent basis. From time to time, we conduct both
outbound and inbound telemarketing campaigns. The size of each campaign varies
depending upon the nature and type of advertising we are using to drive the
campaign, and our outbound telemarketing campaigns are generally timed to take
advantage of the broadcast schedule of our television commercials.
Our Web Site
We seek to combine our broad product selection and pet health
information with the unique aspects of the Internet to deliver a convenient and
personalized shopping experience. We recently launched our enhanced web site. We
believe that our web site offers a broad product selection for dogs and cats,
supported by relevant editorial and easily obtainable or retrievable resource
information. From our home page, customers can search our web site for products
or content, view the "Pet of the Day" and access resources on a variety of
information on cats and dogs. Customers can shop at our web site by pet type,
category, product line or individual product.
Our web site also serves as a resource center for pet owners. The
timely, relevant, topical nature of the information reinforces the connection
that pet owners have with their animals. We offer the following enhanced content
to our customers:
- The "Pet of the Day" features pictures of pets submitted by
our customers; and
- An educational section that provides information on various pet
topics, including care and safety, behavior and socialization, growth and
nutrition, veterinary procedures, allergies, kittens, puppies, joint disease,
parasites and medications.
In order to improve our site, we intend to continue to expand our
product selection, enhance our customers' shopping experience and develop
additional personalized features utilizing the information we learn about our
customers. We will also seek to encourage more frequent and more extensive use
of our web site by updating our web site content on a weekly basis. Our web site
will also be expanded to include features which will encourage increased
participation in a range of community forums, events and newsletters.
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Planned enhancements to the shopping portion of our web site include
personalized shopping lists, interactive customer service, personalized
communications and targeted offers. The personalized shopping feature will allow
returning customers to consult their personalized shopping lists to review
earlier purchases. These shopping lists will simplify the purchase of
regularly-replenished items, because a customer can move products into a
shopping cart directly from the list. Through interactive customer service we
will provide a real-time, online interface with our customer service
representatives to further enhance our responsiveness to customer inquiries. We
will use information provided to us by our customers about their buying
preferences to develop personalized communications and to deliver useful
newsletters, special offers and new product announcements either by e-mail or
telephone. We anticipate these shopping related enhancements will be launched on
our web site during the later part of calendar 2000.
Planned content additions to our web site include:
- A community section which includes discussion forums and information
on the Abused and Endangered Animal Foundation that we sponsor;
- An online healthcare section that includes day to day issues such as
dental care for dogs or cats, the need to keep a pet's intestinal tract parasite
free and tips for caring for the elderly dog or cat;
- Our veterinarian strategic partnership program which will provide a
referral source for our customers through a nationwide network of community
veterinarians;
- An online veterinarian who will offer general advice on a wide range
of topics, ranging from housebreaking a new puppy to explaining the difference
between prescription medications;
- An online newsletter, developed by an in-house editorial staff, which
will feature topics of general interest to pet owners;
- Online educational videos, utilizing streaming media technology, on a
variety of topics such as "How to Administer an Injection" or "How to Brush Your
Pet's Teeth;"
- Professional resources, including a list of veterinarians who are
part of our veterinarian strategic partnership program, pet hospitals and
emergency care centers, kennel and boarding facilities, groomers and pet
sitters; and
- Pet friendly travel advice.
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Verterinarian Strategic Partnership Program
Our goal is to establish a nationwide network of community
veterinarians to whom we can refer customers. We believe this veterinarian
strategic partnership program will foster relationships between pet owners and
veterinarians, as well as build relationships between PetMed Express and
veterinarians nationwide.
Veterinarians participating in our veterinary strategic partnership
program will agree to provide the customers with a one-time discount from the
cost of the veterinarian's services. We anticipate that our network will begin
to be established in Florida during this year, expanding nationwide in the
future. We may, however, encounter unforeseen delays in the establishment of the
network.
Our Customers
Our customers are located throughout the United States, with the
largest concentration of customers residing in Florida, California, Texas, New
York and North Carolina. Based upon our internal analysis, a vast majority of
our customers are female, between the ages of 39 and 59 and have annual incomes
between $50,000 to $150,000. Our average customer purchases 2.3 times annually.
The average individual purchase is approximately $65.
While our historic focus has been on retail customers, we have also
sold various non-prescription medications wholesale to a variety of businesses,
including pet stores, groomers and traditional brick and mortar stores in the
United States. For the fiscal year ended March 31, 2000, approximately 64% of
our sales were made to retail customers and approximately 36% of our sales were
made to wholesale customers. Our focus remains on the retail customer, and we
anticipate that the percentage of our total sales attributable to wholesale
sales will decrease in the future.
Marketing
The goal of our marketing strategy is to build brand recognition,
increase customer traffic, add new customers, build strong customer loyalty,
maximize reorders and develop incremental revenue opportunities. We use a
combination of television advertising, direct mail and outbound telemarketing
campaigns to drive catalog and online sales. We have the ability to target our
key demographic group through our focused marketing efforts. We have an
integrated marketing campaign that includes the following:
- Television Advertising. Our television advertising is designed to
build brand equity, create awareness, and generate initial purchases of products
from new catalog and web site customers. We have used a number of different
television commercials, both 30 and 60 seconds in length, to attract customers.
Our television commercials typically focus on our ability to rapidly deliver to
customers the same medications offered by veterinarians, but at reduced prices.
We generally purchase advertising on national cable channels, including Animal
Planet, to target our key
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demographic group. We believe that television advertising is particularly
effective and will become more instrumental to building brand awareness. While
we have used television since October 1997, our use of this marketing medium has
been selective due to our limited advertising budget.
- Direct Mail and Inserts. We use direct mail to advertise our products
to selected groups of customers. We utilize mailing lists obtained from both
private and public sources to advertise specifically to pet owners. From time to
time, we also advertise our products through free standing inserts, which are
typically included in magazines such as Pointing Dog Journal and Retriever
Journal. Historically, we have used this advertising medium to reach a large
audience cost-effectively.
- Online Marketing. To date, we have not marketed our products online.
We intend to supplement our traditional advertising with online advertising and
marketing efforts in the future as cash flow permits. We are also a member of
the LinkShare Network, an affiliate program with more than 150 merchant clients
and 65,000 affiliate web sites. This network is designed to develop and build a
long-term, branded affiliate program in order to increase online sales and
establish an Internet presence. 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
establish as a result of our membership in the network, with a minimum monthly
payment of $2,000.
- Philanthropic Marketing. Our philanthropic efforts are designed to
contribute to the well-being of pets, deepen our relationship with pet owners
and expand our customer base. The Abused and Endangered Animal Foundation, a
not- for-profit organization created by Dr. Marc A. Puleo, our chief executive
officer, is a charitable foundation which provides direct financial support to
animal shelters, animal therapy and service dog programs, as well as pet care
and wellness organizations. Voluntary donations are solicited from our customers
at the time of sale. Since its formation in June 1999, we have collected
approximately $25,000 for the foundation. Our goal is to raise more than
$100,000 for these organizations during calendar 2000.
Operations
Purchasing
We purchase our products from a variety of sources, including
manufacturers, domestic and international distributors and veterinarians. We
have multiple suppliers for each of our products. We source prescription and
non-prescription medications from a variety of national and international
distributors in order to obtain the lowest cost.
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We purchase the majority of our health and nutritional supplements and
accessories directly from manufacturers. See Risk Factors.
We believe having strong relationships with product manufacturers will
insure the availability of adequate volume of products ordered by our customers
and enable us to provide more and better product information. Historically,
substantially all the major manufacturers of prescription and non-prescription
medications have declined to sell these products to direct marketing companies,
including us. As part of our growth strategy, we will seek to develop direct
relationships with leading pharmaceutical manufacturers of the more popular
prescription and non-prescription medications.
Order Processing
We provide our customers with toll-free telephone access to our sales
representatives. Orders can be received by telephone, online, mail and
facsimile. Our call center generally operates from 9 a.m. to 11 p.m., Monday
through Friday, and 9 a.m. to 5 p.m. on Saturdays and Sundays, Eastern time.
Customers may place orders directly on the Internet on a 24/7 basis.
When an order has been entered into the management information system
by a sales representative, it is forwarded to our distribution center. Tracking,
manifesting, billing and other shipping functions are integrated into our
management information system so that all necessary bar codes and tracking
information for shipments via independent couriers are printed directly on the
shipping label.
After the invoice for an order is printed, the order is pulled from
inventory and scanned to insure that the prescription, if applicable, and
quantity of each item matches the order in our management system. After the
order has been scanned for accuracy, the order is packed for shipping according
to the method requested by the customer.
Warehousing and Shipping
We inventory our products and fill all customer orders from our 50,000
square foot facility in Pompano Beach, Florida. We have 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, fulfillment and shipment of the product to the customer. We began
operations at this new distribution center in July 1999. We believe that this
facility has the capacity to support annual sales of approximately $150 million.
We cannot guarantee you, however that our sales will ever reach this level.
We offer a variety of shipping options, including next day delivery. We
ship to anywhere in the United States served by the United Parcel Service (UPS)
or the United States Postal Service. Priority orders are expedited in our
fulfillment process. Our goal is to ship the products the same day that the
order is received. For prescription
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medications, our goal is to ship the product immediately after the prescription
has been properly authorized. A shipping and handling fee is added to each
customer's order. As we enhance our web site in the future, we anticipate that
we will provide customers access to online order-tracking information.
Customer Service and Support
We believe that a high level of customer service and support is
critical in retaining and expanding our customer base. Customer service
representatives participate in ongoing training programs under the supervision
of our training manager. These training sessions include a variety of topics
such as product knowledge, computer usage, customer service tips and the
relationship between PetMed Express and veterinarians. Our customer service
representatives respond to customer e-mails and calls that are related to order
status, prices and shipping. If our customer service representatives are unable
to respond to a customer's inquiry at the time of the call, we strive to provide
an answer within 24 hours. We believe our customer service representatives are a
valuable source of feedback regarding customer satisfaction. We currently have
five customer service representatives. Our customer service representatives are
currently available from 9 a.m. to 10 p.m., Eastern time, Monday through
Thursday, 9 a.m. to 8 p.m. on Friday, and 9 a.m. to 5 p.m. on Saturday and
Sunday.
We are dedicated to customer satisfaction. We have a policy of meeting
or beating any competitor's price at the time an order is placed. We also offer
a "no questions asked" 30-day return policy on all products we sell, except
opened medications. At the customer's option, either the full purchase price is
refunded or the customer is shipped a replacement product. Our returns currently
average approximately 2% of total sales.
Technology
We have implemented a broad array of services and systems for site
management, searching, customer interaction, transaction processing and
fulfillment. Our current software applications allow for:
- accepting and processing credit card orders;
- order fulfillment;
- tracking and fulfilling back-orders;
- managing shipment of products to customers based on various
other ordering criteria and medicinal needs;
- administering our Refer-A-Friend and PetMed Express Discount
Club programs; and
- processing returns.
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Our systems were designed to provide real-time connectivity to our
distribution center and include an inventory-tracking system, order tracking
system and executive information system. Our Internet server uses Verisign
digital certificates to help conduct secure communications and transactions. Our
web site is hosted in Miami at Florida's Internet NAP (Network Access Point),
one of only several NAPs across the United States. This access point, which
provides direct international distribution for World Wide Web traffic and is not
congested with the high traffic volumes of other NAP's, utilizes a high-speed
fiber-optic connection to the Internet.
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.
We believe that the following are principal competitive factors in our
market:
- product selection and availability, including the availability
of prescription and non-prescription medications;
- price;
- brand recognition;
- quality of web site content;
- reliability and speed of order shipment;
- personalized service; and
- convenience.
We compete with veterinarians in the sale of prescription and
non-prescription pet medications and health and nutritional supplements. Many
pet owners may prefer the convenience of purchasing the pet medications or
health and nutritional supplements at the time of the veterinarian visit, or may
be fearful of offending their veterinarian by not purchasing these products from
the veterinarian. In order to effectively compete with veterinarians, we must
continue to educate pet owners about the benefits offered by PetMed Express.
We also compete with brick and mortar and online retailers of health
and nutritional supplements and pet accessories. Many of these competitors have
longer operating histories, larger customer or user bases, a more established
online presence,
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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.
Intellectual Property
We conduct our business under the trade name "PetMed Express (R)" which
is a registered trademark. We have also applied to the United States Patent and
Trademark Office for protection of the trademark "Heartshield (TM)," and believe
this application will be granted in the near future. We believe these marks have
significant value and are important factors 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 the loss of this
address would have a material adverse effect on our financial position and
results of operations.
Government Regulation
Dispensing prescription medicines is governed at the state level by the
boards of pharmacy or similar regulatory agencies of each state where
prescription medications are dispensed. We are subject to regulation by the
State of Florida and, 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 United States
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 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 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. See also Item 3. Legal Proceedings.
We do not dispense controlled substances because we believe dispensing
these drugs carries with it increased risks, including fraud, illegal resale of
prescription drugs, as well as the special storage, shipping and handling
requirements. Controlled substances, better know as Scheduled II
pharmaceuticals, are drugs classified by the Control Substance Act of 1970 as
having a potential for abuse. An example of a controlled substance in pet
medications would be phenobarbital which is used to control seizures. See also
Item 3. Legal Proceedings.
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Special matters related to development of generic equivalents
In connection with the proposed development of Heartshield (TM) and
other generic medications, we will become regulated 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 the
medication. FDA requirements and/or reviews may increase the amount of time and
money necessary to develop and bring the product to market.
Companies desiring to achieve product approval for a generic animal
drug must conform to the regulations, policies and procedures of the FDA's
Center for Veterinary Medicine (CVM). This entails developing a product which
contains the same component levels as the pioneer, or original product, and
demonstrating through appropriate studies the safety and effectiveness
equivalency of the generic drug. Companies must produce products for these
studies under the FDA's good manufacturing practice regulations, and submit the
appropriate documentation to the CVM. 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 FDA approval for
the product. These actions are briefly described below. When appropriate during
the developmental process, we will also engage a third-party generic
pharmaceutical manufacturing company to prepare the samples to obtain approval,
and select an FDA-approved laboratory for testing of these samples.
During the development process we must develop analytical methods which
are capable of analyzing the product accurately and reliably for efficacy,
quality, and conformance to specifications. We must demonstrate that the product
will remain stable by the use of stability indicating methodology. During the
development process we must also establish the necessary manufacturing
formulations and procedures.
Once this has been completed, the product must be shown through
appropriate studies to be the equivalent of the pioneer product. These studies
are performed under CVM accepted protocols, and study reports are written and
submitted to the CVM for approval. Documentation for all manufacturing
procedures and controls used for producing the generic drug must also be
prepared and sent to the CVM for approval. In addition to the CVM documentation,
product stability data from a three month study with the product held at label
temperatures plus accelerated temperature and humidity conditions must be
submitted. When submitted for review by the CVM, the product must be in the
final dosage form in the proposed market container.
The CVM has 180 days to review the documentation sent to it; if their
review results in questions which require the submission of additional data, the
180 day review period begins again once the re-submission is made. When
acceptance letters are
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received from the CVM for each of the required sets of data, an administrative
abbreviated new animal drug (ANADA) is submitted to the FDA which contains
summary information, patent status of the pioneer product, generic product
labeling, acceptance letters, and freedom of information summary which
summarizes the efficacy and safety of the product. The submission is generally
reviewed within 60 days, after which time the generic drug is approved for
introduction.
We will also come under the jurisdiction of various other United States
regulatory and enforcement departments and agencies, including the Federal Trade
Commission and the Department of Justice in the United States. We may become a
party to administrative and legal proceedings and actions by those organizations
which would result in 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.
Employees
As of July 7, 2000, we had 65 full time employees, including:
- 35 in sales and marketing, and customer service;
- 10 in fulfillment and distribution;
- 7 in our pharmacy;
- 3 in information technologies;
- 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.
Risk Factors
You should carefully consider the risks and uncertainties described below, and
all the other information included in this annual report before you decide to
invest in our common stock. Any of the following risks could materially
adversely affect our business, financial condition or operating results and
could result in a partial or full loss of your investment.
We have a history of losses and we may never achieve profitability.
Since we began our operations, we have incurred net losses to common
stockholders of approximately $288,000, $1,192,000, $468,000 and $1,794,000 for
the fiscal years ended March 31, 1997, 1998, 1999 and 2000, respectively. We may
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continue to incur losses in the future. In order to reach our business growth
objectives, we expect to incur significant operating expenses, and make
significant capital expenditures, during the next several years. We are likely
to spend these amounts before we receive any incremental sales from these
efforts. In addition, our efforts may be more expensive than we currently
anticipate, or they may not result in proportionate increases in our sales,
which could further increase our losses. Accordingly, we will likely experience
negative cash flow from operations for the foreseeable future. In addition, our
losses are likely to be greater than the losses we might otherwise incur if we
continued to develop our business more slowly. In order to offset these
expenses, we will need to generate significant additional sales. To the extent
that sales do not increase as a result of this increased spending, we may not be
able to achieve profitability in the future. If we do achieve profitability, we
may not be able to sustain profitability.
We will need to raise additional capital in order to continue to implement our
business plan.
The report issued by our independent auditors on our financial
statements for the year ended March 31, 2000 contains a modification for a going
concern uncertainty. We will be required to raise additional capital during the
next 12 months to satisfy our cash requirements in order to implement our
business plan. Presently our working capital is limited to capital available to
us from operations or under our working capital line. We will in all likelihood
seek to raise additional capital through the sale of equity securities. We
cannot guarantee you that we will be successful in obtaining capital upon terms
acceptable to us, if at all. Our failure to secure necessary financing could
have a material adverse effect on our financial condition and results of
operations.
Because we have been in business for a short period of time, there is limited
information upon which investors can evaluate our business.
We have a limited operating history upon which to base an evaluation of
us and determine our prospects for achieving our business objectives. We are
prone to all of the risks inherent to the establishment of any new business
venture. You should consider the likelihood of our future success to be highly
speculative in light of our limited operating history, our history of losses and
the problems, expenses, risks, and complications frequently encountered by
similarly situated companies. We may not be successful in addressing these
risks, and our failure to do so could have a material adverse effect on our
business, prospects, financial condition and results of operations.
We currently purchase our prescription and non-prescription medications from
third party distributors and we are not an authorized distributor of those
products. We do not have any guaranteed supply of these medications at any
pre-established prices.
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For the fiscal year ended March 31, 2000, approximately 91% of our
sales were attributable to sales of prescription and non-prescription
medications. Sales of these products have also accounted for similar percentage
of our total sales during the fiscal year ended March 31, 1999. Historically,
substantially all the major pharmaceutical manufacturers have declined to sell
prescription and non-prescription pet medications directly to us. In order to
assure a supply of these products, we purchase medications from various
secondary sources, including a variety of national and international
distributors. Our business strategy includes seeking to establish direct
purchasing arrangements with major pet pharmaceutical manufacturing companies.
If we are not successful in achieving this goal, we would continue to rely upon
distributors.
We cannot guarantee that if we continue to purchase prescription and
non- prescription pet medications from distributors that we will be able to
purchase an adequate supply to meet our customers' demands, or that we will be
able to purchase these products at competitive prices. As these products
represent a significant portion of our sales, our failure to fill customer
orders for these products could adversely impact our sales. If we should be
forced to pay higher prices for these products to ensure an adequate supply, we
cannot guarantee that we will be able to pass along to our customers any
increases in the prices we pay for these medications. This inability to pass
along increased prices could materially adversely affect our results of
operations.
Our failure to properly manage our inventory may result in excessive inventory
carrying costs which could materially adversely affect our financial condition
and results of operations.
Our current product line contains approximately 2,400 SKUs. A
significant portion of our sales are attributable to products representing
approximately 60 SKUs. We need to properly manage our inventory to provide an
adequate supply of these products and avoid excessive inventory of the products
representing the balance of the SKUs. We generally place orders for products
with our suppliers based upon our internal estimates of the amounts of inventory
we will need to fill future orders. These estimates may be significantly
different from the actual orders we receive. In the event that subsequent orders
fall short of original estimates, we may be left with excess inventory.
Significant excess inventory could result in price discounts and increased
inventory carrying costs. Similarly, if we fail to have an adequate supply of
some SKUs, we may lose sales opportunities. We cannot guarantee that we will
maintain appropriate inventory levels. Any failure on our part to maintain
appropriate inventory levels may have a material adverse effect on our financial
condition and results of operations.
Resistance from veterinarians to authorize prescriptions could cause our sales
to decrease and could materially adversely affect our financial condition and
results of operations.
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Since we began our operations, from time to time, some veterinarians
have resisted providing our customers with a copy of their pet's prescription or
authorizing the prescription to our pharmacy staff, thereby effectively
preventing us from filling such prescriptions under the laws of many states.
Sales of prescription medications represented approximately 28% and 29% of our
sales for the fiscal years ended March 31, 1999 and 2000, respectively. Although
veterinarians in some states are required by law to provide the pet owner with
this information, if the number of veterinarians who refuse to authorize
prescriptions should increase, our sales could decrease and our financial
condition and results of operations could be materially adversely impacted.
Our success depends in part on the willingness of consumers to purchase pet
medications from us. If we do not succeed in changing consumer purchasing
patterns, our results of operations may be materially adversely affected.
The direct marketing of prescription and non-prescription pet
medications is in its infancy. Our success will depend upon our ability to
engage consumers who have historically purchased pet medications and health and
nutritional supplements from veterinarians. We may not be able to convert a
large number of these pet owners to our customers. In order for us to be
successful, many of these consumers must be willing to utilize new ways of
buying these products. We cannot guarantee that we will be successful in
shifting these consumers' purchasing patterns away from veterinarians to us. If
we do not attract consumers to purchase these products from us, our results of
operations will be materially adversely impacted.
We purchase medications from international distributors and we do not always
know if those distributors have the authority of the manufacturer to sell the
products in the United States. As a result, we may be subject to future civil or
administrative actions regarding those products.
We purchase a portion of our prescription and non-prescription
medications from international distributors. These medications may be
trademarked and/or copyrighted products manufactured in foreign countries or in
the United States and sold by the manufacturer to foreign distributors. Some of
the prescription and non-prescription medications may have been manufactured by
entities, particularly foreign licensees, who are not the licensors or owners of
the trademarks or copyrights for the medications. From time to time, United
States trademark and copyright holders, their licensees, trade associations and
the United States Customs Service have instigated litigation or administrative
agency proceedings in an attempt to halt the importation or sale of trademarked
and/or copyrighted products. The courts remain divided on the extent to which
trademark, copyright or other laws, rules, regulations or decisions may restrict
the importation or sales of this merchandise without the consent of the
trademark or copyright owner.
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There can be no assurance that future judicial, legislative or
administrative agency action, including possible import, export, tariff or other
trade restrictions, will not limit or eliminate some of the secondary sources of
supply used by us. Moreover, there can be no assurance that our business
activities or merchandise sold to us will not become the subject of legal or
administrative actions brought by manufacturers, distributors, the United States
Customs Service or others. Such judicial, legislative, administrative or legal
actions could have a material adverse effect on our business and results of
operations.
We may fail to comply with various state regulations covering the dispensing of
prescription pet medications. We could be subject to reprimands, sanctions,
probations, fines, suspensions or the loss of one or more of our pharmacy
licenses.
The sale and delivery of prescription pet medications is generally
governed by state laws and regulations. We are licensed as a pharmacy in all 50
states, and each sale we make of a prescription pet medication is likely to be
covered by the laws of the state where the customer is located. The laws and
regulations relating to the sale and delivery of prescription pet medications
vary from state to state, but generally require that prescription pet
medications only be dispensed with authorization from a veterinarian or an
authorized agent in the veterinarian's office.
While we make every effort to fully comply with the applicable state
rules and regulations, from time to time we have been the subject of
administrative complaints regarding the authorization of prescriptions prior to
shipment. See Item 3. Legal Proceedings. We cannot assure you that we will not
continue to be the subject of administrative complaints in the future. We cannot
guarantee you that we will not be subject to reprimands, sanctions, probations,
or to fines, or that one or more of our pharmacy licenses may not be suspended
or revoked.
A significant portion of our sales are made to residents of five states. If we
should lose our pharmacy license in one or more of these states, our financial
condition and results of operations would be materially adversely affected.
While we ship pet medications to customers in almost all 50 states,
approximately 56% of our sales for the fiscal year ended March 31, 2000 were
made to customers located in the states of Florida, California, Texas, New York
and North Carolina. Similarly, approximately 46% of our sales for fiscal 1999
were made to residents of those states. If for any reason our license to operate
a pharmacy in one or more of those states should be suspended or revoked, or if
it is not renewed, our financial condition and results of operations would be
materially adversely affected.
We face significant competition from veterinarians and traditional and online
retailers and may not be able to profitably compete with them.
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We compete directly and indirectly with:
- veterinarians in the sale of pet medications and health and
nutritional supplements. Veterinarians hold a competitive
advantage over us because many pet owners may find it more
convenient or preferable to purchase these products directly
from their veterinarians at the time of an office visit, and
- both online and traditional retailers of pet products,
including catalog retailers, in the sale of health and
nutritional supplements and pet products. Both traditional and
online retailers may hold a competitive advantage over us
because of longer operating histories, established brand
names, greater resources and an established customer base.
Online retailers may have a competitive advantage over us
because of established affiliate relationships to drive
traffic to their web site. Traditional retailers may hold a
competitive advantage over us because pet owners may prefer to
purchase these products from a store instead of online or
through traditional catalog/telephone methods.
In order to effectively compete in the future, we may be required to
offer promotions and other incentives which may result in lower operating
margins or increased operating losses.
We also face a significant competitive challenge from our competitors
forming alliances with each other, such as those between online and brick and
mortar retailers. These relationships may enable both their retail and online
stores to negotiate better pricing and better terms from suppliers by
aggregating the demand for products and negotiating volume discounts which could
be a competitive disadvantage to us.
The content of our web site could expose us to various kinds of liability which,
if prosecuted successfully, could negatively impact our business.
Because we post product information and other content on our web site,
we face potential liability for negligence, copyright infringement, patent
infringement, trademark infringement, defamation and other claims based on the
nature and content of the materials we post. Various claims have been brought,
and sometimes successfully prosecuted, against Internet content distributors. We
could be exposed to liability with respect to the unauthorized duplication of
content or unauthorized use of other parties' proprietary technology. Although
we maintain general liability insurance, our insurance may not cover potential
claims of this type, or may not be adequate to indemnify us for all liability
that may be imposed. Any imposition of liability that is not covered by
insurance, or is in excess of insurance coverage, could materially adversely
affect our financial condition and results of operations.
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We may not be able to protect our intellectual property rights, and we may be
found to infringe on the propriety rights of others.
We rely on a combination of trademark, trade secret, copyright laws and
contractual restrictions to protect our intellectual property. These afford only
limited protection. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy our private label generic equivalents,
when and if developed, as well as aspects of our sales formats, or to obtain and
use information that we regard as proprietary, including the technology used to
operate our web site, our content and our trademarks.
We have obtained a United States trademark registration for "PetMed
Express," and have filed an application for a United States trademark
registration of Heartshield (TM). We may be unable to secure this mark. It is
possible that our competitors or others will adopt service names similar to
ours, thereby impeding our ability to build brand identity and possibly leading
to customer confusion. There could be potential trade name or trademark
infringement claims brought by owners of other registered trademarks or
trademarks that incorporate variations of the term PetMed Express(R) or
Heartshield(TM). Any claims or customer confusion related to our trademarks, or
our failure to obtain any trademark registration, would negatively affect our
business.
Litigation or proceedings before the United States Patent and Trademark
Office may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets and domain names, and to determine the
validity and scope of the proprietary rights of others. Any litigation or
adverse priority proceeding could result in substantial costs and diversion of
resources, and could seriously harm our business and operating results.
Third parties may also claim infringement by us with respect to past,
current or future technologies. We expect that participants in our markets will
be increasingly involved in infringement claims as the number of services and
competitors in our industry segment grows. Any claim, whether meritorious or
not, could be time consuming, result in costly litigation, cause service upgrade
delays or require us to enter into royalty or licensing agreements. These
royalty or licensing agreements might not be available on terms acceptable to us
or at all.
If we are unable to protect our Internet domain name or to prevent others from
using names that are confusingly similar, our business may be adversely
impacted.
Our Internet domain name, www.petmedexpress.com, is critical to our
brand recognition and our overall success. If we are unable to protect this
domain name, our competitors could capitalize on our brand recognition. We are
aware of substantially
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similar domain names, including www.petmeds.com and www.petmed.com, in use by
competitors. The acquisition and maintenance of domain names is generally
regulated by governmental agencies and their designees. The regulation of domain
names in the United States and in foreign countries has changed, and may undergo
further change in the near future. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we may not be able to protect our own
domain name, or prevent third parties from acquiring domain names that are
confusingly similar to, infringe upon or otherwise decrease the value of our
domain name.
Since all of our operations are housed in a single location, we are more
susceptible to business interruption in the event of damage to or disruptions in
our facility.
Our headquarters and distribution center are located in the same
building in South Florida, and all of our shipments of products to our customers
are made from this sole distribution center. We have no present plans to
establish any additional distribution centers or offices. Because we consolidate
our operations in one location, we are more susceptible to power and equipment
failures, and business interruptions in the event of fires, floods and other
natural disasters than if we had additional locations. Furthermore, because we
are located in South Florida, which is a hurricane-sensitive area, we are
particularly susceptible to the risk of damage to, or total destruction of, our
headquarters and distribution center and surrounding transportation
infrastructure caused by a hurricane. We cannot assure you that we are
adequately insured to cover the amount of any losses relating to:
- any of these potential events; or
- business interruptions resulting from damage to or destruction
of our headquarters and distribution center; or
- interruptions or disruptions to major transportation
infrastructure or other events that do not occur on our
premises.
A portion of our sales are seasonal and our operating results are difficult to
predict and may fluctuate.
Because our operating results are difficult to predict, we believe that
quarter-to- quarter comparisons of our operating results are not a good
indication of our future performance. A portion of our sales are seasonal in
nature, primarily as a result of the volume of sales of flea and tick control
products during the summer season. This seasonality results in increased sales
of these products during our first and second fiscal quarters. In addition to
the seasonality of some of our sales, our annual and quarterly operating results
have fluctuated in the past and may fluctuate significantly in
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the future due to a variety of factors, many of which are out of our control.
Factors that may cause our operating results to fluctuate include:
- our inability to obtain new customers at a reasonable cost,
retain existing customers, or encourage reorders;
- our inability to increase the number of visitors to our web
site, or our inability to convert visitors to our web site
into customers;
- the mix of medications, accessories and other pet products
sold by us;
- our inability to manage inventory levels;
- our inability to adequately maintain, upgrade and develop our
web site, the systems that we use to process customer's orders
and payments, or our computer network;
- increased competition within our market niche;
- price competition;
- increases in the cost of advertising;
- the amount and timing of operating costs and capital
expenditures relating to expansion of our product line or
operations; and
- technical difficulties, systems outages or Internet slowdowns.
Any change in one or more of these factors could materially adversely
affect our results of operations in future periods.
If we do not obtain additional capital, we will be unable to complete the
development and marketing of our own private label generic heartworm medication.
We are proceeding with our efforts in the initial development of a
private label generic heartworm medication. In the future, we may also decide to
develop additional generic equivalents to some of the more popular prescription
and non-prescription pet medications. We will need to invest significant
additional capital to complete these projects. We cannot guarantee you that we
will be successful in obtaining the necessary capital to fund these projects.
In addition, we have no expertise or abilities to internally develop or
manufacture these products, and we are dependent upon third parties to
diligently and cost- effectively perform these services for us. Any failure or
delays on their part will
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adversely impact our financial condition and results of operations. When we
engage third party manufacturers, we may also be required to commit to minimum
order quantities or exclusive relationships with the manufacturer. We have no
previous working relationships with these parties. We cannot guarantee that
these companies will perform their services in a fashion which is both timely
and cost-effective to us.
We will also be faced with the task of developing a market for these
generic equivalents. We will be competing against the manufacturers of some of
the more popular pet medications. These manufacturers have invested significant
funds in developing brand awareness for their products. We may also be competing
against other manufacturers of generic versions of this product. While we
believe we hold a competitive advantage because of our existing customer base,
we cannot guarantee that we will be successful in developing a market for these
products.
Even if we are able to develop our own private label generic pet medications, we
may not receive the required FDA approvals on a timely or cost-effective basis,
if at all.
The development, manufacture, marketing, sale and distribution of
pharmaceutical products is covered by extensive federal, state and local
regulation in the United States. While our business strategy is to contract with
third parties to develop and manufacture these products for us, we must obtain
approval from the FDA before these products can be introduced. The development
process is both costly and time-consuming, and we cannot guarantee that we will
be successful in obtaining FDA approvals for our proposed products. If we are
unable to develop these products on a timely and cost-effective basis, we may
find that by the time the approval has been received, our perceived marketing
advantage may have materially changed.
Assuming that we receive the required FDA approvals for these proposed
products, we will also be required to continually comply with applicable
regulations covering the manufacture, marketing, sale and distribution of these
products, which can also be a costly process. Given the time and costs of this
continued compliance and the costs of development, we cannot guarantee that
development of these products will be profitable.
Our shares of common stock currently have a limited trading market.
Our shares of common stock are currently quoted on the OTC Bulletin
Board. Our shares of common stock currently have only a limited trading market.
As a result, you may find it difficult to dispose of, or to obtain accurate
quotations as to the value of, shares of our common stock and you may suffer a
loss of all or a substantial portion of your investment in our common stock.
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Our stock price fluctuates from time to time and may fall below expectations of
securities analysts and investors, and could subject us to litigation which may
result in you suffering the loss of your investment.
The market price of our common stock may fluctuate significantly in
response to a number of factors, some of which are beyond our control. These
factors include:
- quarterly variations in operating results;
- changes in accounting treatments or principles;
- announcements by us or our competitors of new products and
services offerings, significant contracts, acquisitions or
strategic relationships;
- additions or departures of key personnel;
- any future sales of our common stock or other securities;
- stock market price and volume fluctuations of publicly-traded
companies in general and Internet-related companies in
particular; and
- general political, economic and market conditions.
It is likely that in some future quarter our operating results may fall
below the expectations of securities analysts and investors, which could result
in a decrease in the trading price of our common stock. In the past, securities
class action litigation has often been brought against a company following
periods of volatility in the market price of its securities. We may be the
target of similar litigation in the future. Securities litigation could result
in substantial costs and divert management's attention and resources, which
could seriously harm our business and operating results.
The interests of our controlling stockholders could conflict with those of our
other stockholders.
Our directors and executive officers, together with our other principal
stockholders, own or control approximately 60% of our voting securities. These
stockholders are able to influence the outcome of stockholder votes, including
votes concerning:
- the election of directors;
- amendments to our charter and by-laws; and
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- the approval of significant corporate transactions like a
merger or sale of our assets.
This controlling influence could have the effect of delaying or
preventing a change in control, even if many of our stockholders believe it is
in their best interest.
We may issue additional shares of preferred stock which could defer a change of
control or dilute the interests of our common stockholders. Our charter
documents could defer a takeover effort, which could inhibit your ability to
receive an acquisition premium for your shares.
Our charter permits our board of directors to issue up to 5,000,000
shares of preferred stock without shareholder approval. Currently there are
2,500 shares of our Convertible Preferred Stock. This leaves 4,997,500 shares of
preferred stock available for issuance at the discretion of our board of
directors. These shares, if issued, could contain dividend, liquidation,
conversion, voting or other rights which could adversely affect the rights of
our common shareholders and which could also be utilized, under some
circumstances, as a method of discouraging, delaying or preventing our change in
control.
Provisions of our articles of incorporation, bylaws and Florida law
could make it more difficult for a third party to acquire us, even if many of
our stockholders believe it is in their best interest.
Item 2. Description of Property
All of our facilities, including our principal executive offices, are
located in a 50,000 square foot building located in Pompano Beach, Florida. We
purchased this building in February 1999, and financed it with a seven year,
7.75% mortgage with a commercial bank in the original principal amount of
$1,680,000. We believe that current zoning for this location would allow for a
20,000 square foot expansion of this building. We, however, have no current
plans for an expansion of this building.
Item 3. Legal Proceedings
Various complaints were filed with the Florida Board of Pharmacy and
Florida Agency for Health Care Administration against PetMed Express during 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
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paid the Florida Board of Pharmacy $7,761 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 PetMed Express 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 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 PetMed Express 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
PetMed Express 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 PetMed
Express 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 PetMed Express agreed to a consent order resolving
the matters at issue. The consent order provided that PetMed Express' 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 documenting 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 PetMed Express
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
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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 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.
We are a defendant in a lawsuit entitled Steven Wayne Turner v.
PetMedExpress.com, Inc. filed in the District Court in and for Wagoner County,
Oklahoma. In this nationwide class action lawsuit, the plaintiff asserted six
claims for relief against us: breach of contract; unjust enrichment; recovery of
money paid absent consideration, fraud, under the Florida Consumer Protection
Act; and a declaratory judgment. The plaintiff alleges that he ordered three
items from us over the Internet to be charged to his Visa card. According to the
complaint, the items were shipped and the plaintiff received an invoice for
$47.96, which represented $39.97 for the three items and $7.99 for handling and
insurance. The plaintiff further alleges that the $7.99 included a charge of
$1.95 for insurance which, he asserts, is unnecessary and is not authorized by
contract or law. On April 18, 2000 we filed a motion to dismiss and a supporting
brief. On May 4, 2000 the plaintiff filed a response to our motion. The motion
to dismiss remains pending. We have responded to the first set of
interrogatories, first request for admissions and first request for production
of documents. Counsel for PetMed Express believes that the suit was brought by
class action lawyers in a distant and inconvenient forum to cause us as much
inconvenience and expense as possible with the expectation that we will settle
to avoid the cost and inconvenience of litigation. We intend to vigorously
defend ourselves against these claims. We cannot, however, at this time, predict
either the outcome of this lawsuit or what effect, if any, it will have on our
financial condition or results of operations.
By letter dated March 8, 2000, the Indiana Board of Pharmacy advised us
that our application for a non-resident pharmacy registration was denied based
upon the alleged discipline that was taken on our license in Florida. We filed a
petition for review appealing the decision by the Indiana Board of Pharmacy and
petitioning the Board for an administrative review of its decision. On April 12,
2000 the Indiana Board of Pharmacy issued a notice of hearing scheduling the
matter for an administrative hearing before the Board on May 15, 2000. On that
date we were granted a continuance of the administrative hearing to an
unspecified date. We are continuing discussions in an effort to reach a
resolution to this matter. Should a resolution not be
26
<PAGE>
reached, we intend to vigorously contest the Board's denial. At this time, we
cannot accurately predict the likelihood of an adverse outcome.
By letter dated May 15, 2000, the Attorney General of Missouri
transmitted a proposed complaint against us and advised that the Missouri Board
of Pharmacy has received information which it believes shows cause to discipline
our license as a pharmacy in the State of Missouri. The complaint alleges that
we violated Missouri regulations 4 CSR 270-4.03.1 and 4 CSR 220-2.025 and
federal statutes and regulations 21 U.S.C. ss. 352(f), 21 C.F.R. ss. 201.5 and
21 C.F.R. ss. 201.105. The complaint alleges that each alleged violation
provides cause to discipline our pharmacy license. We contest the charges. The
Board has advised us that it is interested in resolving this matter without the
necessity of proceeding to a formal hearing, and that it will make a settlement
offer to us after reviewing the complaint for 30 days. If we are unable to reach
an agreement with the Board, the Board has advised us that it will file the
complaint against us with the Administrative Hearing Commission, and that the
case will be set for a trial-type evidentiary hearing for determination whether
cause exists to take disciplinary action against our license. We intend to
vigorously defend against the charges. At this time, we cannot predict the
likelihood of an adverse outcome.
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 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Our common stock is quoted on the OTC Bulletin Board under the symbol
"PETS." The following table sets forth for the period indicated the range of
high and low bid quotations per share of our common stock as reported on the OTC
Bulletin Board.
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
27
<PAGE>
Third Quarter $4.75 $2.71
Fourth Quarter $8.125 $3.50
Fiscal 2000
First Quarter $8.75 $5.75
Second Quarter $6.75 $4.00
Third Quarter $4.938 $2.125
Fourth Quarter $4.813 $2.25
Fiscal 2001
First Quarter $3.25 $1.00
Prior to March 2000, we were not a reporting company and were not
required to file quarterly, annual and other reports with the SEC. We were
therefore subject to compliance with the OTC Bulletin Board Eligibility Rule
which required all companies that are quoted on the OTC Bulletin Board to become
reporting companies. During the period from March 9, 2000 until April 5, 2000,
our common stock was delisted for quotation on the OTC Bulletin Board pending
compliance with the OTC Bulletin Board Eligibility Rules and was quoted on the
National Quotation Bureau's Electronic Quotation Service under the symbol PETS.
On April 6, 2000, after we completed the process of complying with the OTC
Bulletin Board Eligibility Rule, our common stock was relisted on the OTC
Bulletin Board.
As of July 7, 2000, there were 52 holders of record of our common
stock. The closing sales price for the common stock on July 6, 2000 as reported
on the OTCBB was $1.25. 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.
28
<PAGE>
Dividend Policy
We have never paid cash dividends on our common stock. We presently
intend to retain future earnings, if any, to finance the expansion of our
business and do not anticipate that any cash dividends on our common stock will
be paid in the foreseeable future. The future dividend policy will depend on our
earnings, capital requirements, expansion plans, financial condition and other
relevant factors.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
You should read the following discussion along with our financial
statements and the related notes included in this annual report.
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 that included the development of a business plan and the
initial activities involved in obtaining the necessary licenses and permits to
dispense prescription medications. We began selling pet medications and products
in September 1996, and in the fall of 1997 we issued our first catalog. This
catalog displayed approximately 1,200 items, including prescription and
non-prescription pet medications, pet health and nutritional supplements and pet
accessories. We have expanded our product line to approximately 2,400 of the
most popular pet items for dogs and cats. We also market our products on our web
site. Since October 1997, we have advertised our products on national cable TV
channels, such as the Animal Planet.
Our sales consist of products sold to retail consumers and sales to
other pet suppliers, or wholesale sales. Our sales also include one and
three-year memberships, which entitle the member to receive a discount on
purchases made during the respective membership periods. Typically, our retail
customers pay by credit card or check at the time the order is shipped. We
usually receive cash settlement in two to three banking days for our sales paid
for by credit cards which minimizes our accounts receivable balances relative to
our sales. Certain wholesale customers are extended credit terms, which usually
require payment within 30 days of delivery. If a customer is not satisfied
within 30 days of the purchase of a product, we refund the full purchase price
or replace the product, except for me dications which have been opened. To date,
our returns average approximately 2% of sales.
For the fiscal year ended Ma rch 31, 2000, approximately 61.7% of our
sales were made through our catalog. While only approximately 3.5% of our sales
for the fiscal year ended March 31, 2000 were made on the Internet, we believe
our products are well-positioned to be marketed and sold online. We have
recently launched our enhanced web site featuring more products and services
aimed at pet owners.
29
<PAGE>
Results of Operations
In the discussion below, we compare our results of operations for the
years ended March 31, 1999 and 2000.
The following table shows for the periods presented the percentage of
sales represented by items on our con solidated statements of operations.
Percentage of Sales
Year Ended March 31,
--------------------
1999 2000
---- ----
Net sales 100.0% 100.0%
Cost of sales 59.9 57.9
----- -----
Gross profit 40.1 42.1
Operating expenses:
General and administrative 28.5 40.4
Advertising 8.5 9.8
Depreciation and amortization 0.9 2.7
----- -----
Total operating expenses 37.9 52.9
Income (loss) from operations 2.2 (10.8)
Other income (expense):
Interest expense (0.6) (1.5)
Interest income 0.2 0.2
Other, net 1.2 (0.1)
----- -----
Income (loss) before provision for
for income taxes 3.0 (12.2)
Provision for income taxes -- 0.0
----- -----
Net Income (loss) 3.0 (12.2)
Accretion for beneficial conversion
feature of preferred stock (7.5) 0.0
----- -----
Net loss available to common
stockholders (4.6%) (12.2)%
==== =====
30
<PAGE>
Sales
Sales increased by approximately $4,453,000, or 44%, to approximately
$14,677,000 for the fiscal year ended March 31, 2000 from approximately
$10,224,000 for the fiscal year ended March 31, 1999. This increase was
primarily attributable to an increase in the number of customers which resulted,
we believe, from increased television advertising and catalog mailings as well
as reorders from existing customers. Non-prescription medications increased as a
proportionate share of sales as a result of increased marketing for flea and
tick medications. Membership fees remained consistent as a proportionate share
of sales.
The following table provides a breakdown of our sales by product
category for the fiscal years ended March 31, 1999 and 2000:
Year Ended March 31,
1999 2000
---------------------
Prescription medications 28% 26%
Non-prescription medications 54 56
Health and nutritional supplements 3 3
Accessories 4 3
Memberships, shipping charges and other 11 12
--- ---
Total sales 100% 100%
Gross Profit
Gross profit increased by approximately $2,077,000, or 51%, to
approximately $6,181,000 for the fiscal year ended March 31, 2000 from
approximately $4,104,000 for the fiscal year ended March 31, 1999. Gross profit
as a percentage of sales for the fiscal years ended March 31, 1999 and 2000 was
approximately 40% and 42%, respectively, reflecting the positive impact of
volume purchasing in response to increased sales.
Operating Expenses
General and administrative. General and administrative expense
increased approximately $3,015,000, or approximately 104%, to approximately
$5,927,000 for the fiscal year ended March 31, 2000 from approximately
$2,912,000 for the fiscal year ended March 31, 1999. General and administrative
expense as a percentage of sales was approximately 28% and 40% for the fiscal
years ended March 31, 1999 and 2000, respectively. The significant increase in
general and administrative expense as a percentage of sales is primarily
attributable to the following:
31
<PAGE>
- approximately $378,000 for the preparation and filing of a Form 10
which was required by NASDAQ to maintain our bulletin board listing,
approximately $259,000 of investment banking related fees as the Company
explored various opportunities to raise capital and $354,000 related to
litigation settlements.
- salaries and related expense for sales, marketing and administrative
employees increased by $1,008,000, or 63%, to $2,596,000 for the fiscal year
ended March 31, 2000 from $1,588,000 for the fiscal year ended March 31, 1999 as
a result of hiring additional personnel.
- credit card fees increased by $111,000, or 47%, to $347,000 for the
fiscal year ended March 31, 2000 from $236,000 for the fiscal year ended March
31, 1999, as a result of increased credit card sales.
Advertising expense. Advertising expense increased by approximately
$577,000, or approximately 67%, to approximately $1,444,000 for the fiscal year
ended March 31, 2000 from approximately $867,000 for the fiscal year ended March
31, 1999. The increase in advertising expense was primarily due to catalog
production and distribution expense, which increased to approximately $692,000
during the fiscal year ended March 31, 2000 from approximately $373,000 during
the fiscal year ended March 31, 1999. In addition, television advertising
increased to approximately $548,000 during the fiscal year ended March 31, 2000
from approximately $388,000 during the fiscal year ended March 31, 1999.
Depreciation and amortization. Depreciation and amortization expense
increased by approximately $298,000, or approximately 307%, to approximately
$395,000 for the fiscal year ended March 31, 2000 from approximately $97,000 for
the fiscal year ended March 31, 1999, as a result of additional equipment to
support our increased level of sales, and the write-off of approximately $78,000
of software which the Company determined to be impaired.
Other Income (Expense)
Interest expense. Interest expense increased approximately $171,000, or
approximately 295%, to approximately $229,000 for the fiscal year ended March
31, 2000 from approximately $58,000 for the fiscal year ended March 31, 1999, as
a result of the increase in indebtedness in order to finance the purchase of our
headquarters and distribution center in March 1999 as well as increased
borrowings under our line of credit.
Other income (expense), net. Other income (expense), net was
approximately $14,400 for the fiscal year ended March 31, 2000 as compared to
income of approximately $118,000 for the fiscal year ended March 31, 1999.
32
<PAGE>
Provision for Income Taxes
We have incurred significant net losses since our inception in 1996.
These losses have resulted in net operating loss carryforwards and deferred tax
assets, which have been used by us to offset tax liabilities which may have
been incurred in prior periods. We have recorded a valuation allowance against
the deferred income tax assets, since future utilization of these assets is
subject to our ability to generate taxable income. There was no income tax
accrual for the fiscal year ended March 31, 1999 due to the utilization of
prior net operating losses to offset taxable income for the period.
Net Loss Available to Common Shareholders
Net loss available to common shareholders increased by approximately
$1,326,000 to $1,794,000 for the fiscal year ended March 31, 2000 from $468,000
for the fiscal year ended March 31, 1999. The increase was attributable to the
aforementioned.
Liquidity and Capital Resources
Our working capital at March 31, 2000 was $398,000, a decrease of
approximately $1,640,000 from March 31, 1999. The change in working capital was
primarily attributable to an increase of $776,000 in borrowings under our line
of credit which was partially used to repay the remaining balance then due on
the related party note payable and $844,000 increase in accounts payable. Net
cash used in operating activities increased to $317,000 for the fiscal year
ended March 31, 2000 from $178,000 for the fiscal year ended March 31, 1999.
This was the result of an increase in net loss of approximately $2,097,000, a
decrease in cash used to acquire inventory of $932,000 and an increase in cash
provided by accounts payable and other liabilities of $915,000. Net cash used in
investing activities decreased to $918,000 for the fiscal year ended March 31,
2000 as compared to $2,706,000 for the fiscal year ended March 31, 1999
primarily as a result of lower investment in property. Net cash provided by
financing activities for the fiscal year ended March 31, 2000 was $862,000
compared to $2,798,000 for the fiscal year ended March 31, 1999. This decrease
was primarily attributable to lower proceeds from sale of common stock and
borrowings in fiscal 1999 under note payable to related party.
Since inception, we have primarily funded our growth through the private
placement of securities. In April 1998, we raised $888,000 of net proceeds from
the private placement of 250,000 shares of Convertible Preferred Stock. In
February 1999, we raised approximately $819,000 of net proceeds from the sale of
330,333 shares of common stock. We have financed certain equipment acquisitions
with capital leases, and as of March 31, 2000, we had outstanding lease
commitments of $426,000.
33
<PAGE>
In March 1999, we purchased a 50,000 square foot building, which serves
as our headquarters and distribution center. In May 1999, we moved our
operations to this location following a renovation of the facility. We currently
have a $1,632,000 mortgage on the building and 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 10% at March 31, 2000. As of March 31, 2000, we had $776,000
outstanding under the line of credit. On February 24, 2000, we agreed to
maintain $300,000 with SouthTrust Bank, as additional collateral on the
mortgage, in exchange for waivers and amendments to two financial covenants. The
requirement to maintain the funds expires no later than December 24, 2000.
For the year ended March 31, 2000, we have incurred significant
operating losses and cash flow deficiencies. This discussion has been prepared
assuming that we will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. We had an operating loss of approximately $1,586,000 for the year
ended March 31, 2000 and negative cash flow from operations of approximately
$317,000. In addition, we were in violation of certain of our debt covenants at
March 31, 2000. As a result, we are dependent upon capital from outside sources
in order to fund future operations. These matters raise substantial doubt about
our ability to continue as a going concern. This discussion regarding our
results of operations as well as our financial statements which are included
elsewhere herein do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
We are actively seeking to raise additional capital through the sale of
equity securities and through the possible sale and leaseback of our land and
building. In addition, we have a plan whereby certain non-essential personnel
and administrative costs may be reduced so that we may continue to meet its
operating and financing obligations as they come due. No assurances can be given
that we will be successful in obtaining additional capital, or that such capital
will be available in terms acceptable to us. Further, there can be no assurance
that even if such additional capital is obtained or the planned cost reductions
are implemented, that we will achieve profitability or positive cash flow.
Item 7. Financial Statements
Our financial statements are contained in pages F-1 through F-25 which
are included later in this annual report.
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
34
<PAGE>
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 PetMed Express 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. The decision to change audit firms was approved by our Board of
Directors.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors and Executive Officers
Our directors and executive officers are as follows:
Name Age Positions Held
---- --- --------------
Marc Puleo, M.D. 37 Chairman of the Board, Chief Executive
Officer, and Assistant Secretary
Christopher Lloyd 35 President, Chief Operating Officer, Secretary
and Director
John S. Vermaaten 41 Chief Financial Officer and Treasurer
Gian Fulgoni 51 Director
Edward Bottum 65 Director
William Weaver 64 Director
Marc Puleo, M.D. has served as our chief executive officer and chairman
of our board of directors since our inception in January 1996, and our assistant
secretary since March 2000. From January 1996 until March 2000, Dr. Puleo also
served as our president. Dr. Puleo has also been the president of South Florida
Anesthesia Professionals, an entity located in Fort Lauderdale, Florida since
founding that
35
<PAGE>
company in January 1996. Dr. Puleo was vice president of Dynamic Press, Inc., an
offset printing and direct marketing company, from June 1997 until June 1998.
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. 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, all located in the Chicago, Illinois area,
from July 1991 through June 1994. Dr. Puleo received his medical degree from the
University of Illinois College of Medicine, Chicago, Illinois.
Christopher Lloyd has served on our board of directors since February
1998, as our chief operating officer since June 1999, as our secretary since
2000, and as our president since March 2000. From 1990 until joining PetMed
Express, Mr. Lloyd was employed in a variety of senior management positions at
Advocate Ravenswood Hospital Medical Center, Chicago, Illinois. He served as
president of Ravenswood Health Enterprises, and vice president of Ravenswood
Health Care Corporation, where he managed all the for-profit subsidiaries.
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.
John S. Vermaaten has served as our chief financial officer and
treasurer since March 2000. From 1996 until joining PetMed Express, Mr.
Vermaaten was chief financial officer, Asia Pacific for Pitney Bowes, Inc., Hong
Kong. From 1990 until 1996, Mr. Vermaaten was chief financial officer and
secretary of James McGraw, Inc., Richmond, Virginia, and from 1984 until 1990 he
was a senior manager at KPMG Peat Marwick in Richmond, Virginia. From 1983 until
1984, Mr. Vermaaten was a senior financial accountant for Best Products, Inc.,
Richmond, Virginia, and from 1981 until 1983, he was employed by Cooper &
Lybrand, Richmond, Virginia. Mr. Vermaaten, a certified public accountant,
received a B.S. in Accounting from Virginia Commonwealth University.
Gian Fulgoni has been a director since August 1999. Since November
1998, Mr. Fulgoni has been chief executive officer 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 chief executive officer of Information Resources,
Inc. (Nasdaq National Market: IRIC), a market research company which developed
the use of scanning data in the consumer package goods industry. Mr. Fulgoni has
been a director of this company since 1981. Mr. Fulgoni also has served on the
board of directors of Platinum Technology, Inc., a privately held software
company, since 1990, and on the board of
36
<PAGE>
directors of Yesmail.com, Inc. (Nasdaq: YSEM), a leading provider of
comprehensive permission mail direct marketing solutions, since March 1999.
Edward Bottum has been a director since August 1999. Mr. Bottum was
vice chairman of Continental Bank Corporation from 1959 until 1990. Since April
1990, he has been the managing director of Chase Franklin Corporation, a
merchant bank. Since 1981, Mr. Bottum has also served as a director of Kellwood
Co. (NYSE: KWD), a manufacturer and marketer of apparel and related soft goods;
since July 1995, Mr. Bottum has been a trustee of The Time Horizon Funds, a
mutual fund family; and since February 1996, has been chairman of Learning
Insights, Inc., a publisher of interactive multimedia training products. Mr.
Bottum has also been a trustee of Pacific Innovations Trust, a variable annuity
fund, since December 1996 and a trustee of Underwriters Laboratories, Inc., a
product safety certification company, since May 1997. In addition, Mr. Bottum
has been a director of CNA Income Shares, Inc. (NYSE: CNN), a closed end, fixed
income fund, since April 1999 and a director of Alleghany Asset Management,
Inc., an asset management company, since April 1999. Mr. Bottum received a B.S.
in Electrical Engineering from Purdue University and an M.B.A. from Harvard
Business School. Mr. Bottom also attended the Graduate School of Banking at the
University of Wisconsin.
William Weaver has been a director 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 that firm. Mr. Weaver joined Sachnoff &
Weaver, Ltd. in 1963. Mr. Weaver has been a director of USFreightways
Corporation (Nasdaq National Market: USFC), a leading provider of transportation
services and innovative logistics solutions, since 1994, and a director 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
several privately-held corporations. Mr. Weaver received an A.B. from Oberlin
College and a J.D. from the University of Chicago John Marshall Law School.
There is no family relationship between any of the executive officers
and directors. Each director is elected at our annual meeting of stockholders
and holds office until the next annual meeting of stockholders, or until his
successor is elected and qualified. The bylaws permit the board of directors to
fill any vacancy and that director may serve until the next annual meeting of
stockholders 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.
Committees of the Board of Directors
Our board of directors has established an audit committee and a
compensation committee, both of which are comprised of non-employee directors.
37
<PAGE>
Our audit committee recommends the independent public accountants to be
engaged by us, determines independence, reviews the plan, scope and results of
our annual audit, reviews the audit results and reviews our internal controls
and financial management policies with our independent public accountants. The
members of the audit committee are Messrs. Fulgoni, Bottum and Weaver.
Our compensation committee establishes guidelines and standards
relating to the determination of executive compensation, reviews executive
compensation policies and recommends to our board of directors compensation for
our executive officers and other employees. Our compensation committee also
administers our stock incentive plans and determines the number of shares
covered by, and terms of, options to be granted to executive officers and other
employees under these plans. The members of the compensation committee are
Messrs. Fulgoni and Bottum.
Directors' Compensation
We have adopted a compensation policy for our non-employee directors,
which includes options being granted to them, 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. These options vest at the rate of
15,000 options on each of the first, second, third and fourth annual
anniversaries date of the date of grant, provided that the director remains a
member of our board of directors on the respective vesting date.
Messrs. Fulgoni, Bottum and Weaver are currently our only non-employee
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.
We reimburse our non-employee directors for their reasonable
out-of-pocket expenses incurred in attending board and committee meetings.
Compensation Committee Interlocks and Insider Participation
The board of directors established its compensation committee in
January 2000. Prior to establishing its compensation committee, the board of
directors, as a whole, performed the functions delegated to the compensation
committee. No interlocking relationship currently exists or has existed in the
past between our board of directors or compensation committee and the board of
directors or compensation committee of any other company.
38
<PAGE>
Compliance With Section 16(a) of the Exchange Act
We became a reporting company under the Securities Exchange Act of 1934
(the "Exchange Act") in March 2000. Based solely upon a review of Forms 3 and 4
and amendments thereto furnished to us under Rule 16a-3(d) of the Exchange Act
during the fiscal year ended March 31, 2000 and Forms 5 and amendments thereto
furnished to us with respect to the fiscal year ended March 31, 2000, we are not
aware of any person that failed to file on a timely basis, as disclosed in the
aforementioned Forms, reports required by Section 16(a) of the Exchange Act
during the fiscal year ended March 31, 2000, other than the unintentional
failure of each of the officers and directors to file the initial Form 3
subsequent to us becoming a reporting company. We have been advised by each of
these individuals that they will file these delinquent reports as soon as
practicable.
Item 10. Executive Compensation
The following table provides a summary of cash and non-cash
compensation for each of the last two fiscal years ended March 31, 1999 and 2000
received by our chief executive officer who is referred to as the named
executive officer. No executive officer received compensation in excess of
$100,000 in these fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation
------------------- Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation Options Compensation
------------------ ---- ------ ----- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Marc Puleo, M.D., 1999(1) -0- - - 600,000 -
Chief Executive 2000(1) -0- -0- -0- -0-
Officer, Chairman
</TABLE>
(1) During our fiscal years ended March 31, 1999 and 2000, Dr. Puleo did
not receive a cash salary as compensation for his services to us. As
described elsewhere in this annual report, Dr. Puleo's compensation has
been in the form of stock options. We have, however, recognized an
expense of $80,000 and $100,000 for the fiscal years ended March 31,
1999 and 2000, respectively, as the value of his services to us. Please
see Note 5 to the consolidated financial statements included in this
annual report. Dr. Puleo served as our president from January 1996
until March 2000. On May 1, 2000 we entered into a two year employment
agreement with Dr. Puleo which provides for annual cash compensation to
him of $150,000. See Item 10. Executive Compensation - Employment
Agreements below.
39
<PAGE>
Fiscal 2000 Option Grants
The following table sets forth each grant of stock options during the
fiscal year ended March 31, 2000 to the named executive officers:
<TABLE>
<CAPTION>
Individual Grants
Potential Realizable
Value at Assumed
Number Percentage Annual Rates of
of Securities of Total Options Stock Price
Underlying Granted to Appreciation for
Options Employees Exercise Expiration Option Term (1)
Name Granted in Fiscal 2000 Price ($/sh) Date 5%($) 10%($)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Marc A. Puleo, M.D.
Chief Executive Officer,
Chairman 0 0 0 0 0 0
</TABLE>
(1) Potential realizable value is presented net of the option exercise
price, but before any federal or state income taxes associated with
exercise. It is calculated assuming that the fair market value on the
date of the grant appreciates at the indicated annual rates, compounded
annually, for the term of the option. The 5% and 10% assumed rates of
appreciation are mandated by the rules of the SEC and do not represent
our estimate or projection of future increases in the price of our
common stock. Actual gains will be dependent on the future performance
of our common stock and the option holder's continued employment
through the vesting periods. The amounts reflected in the table may not
be achieved.
Fiscal 2000 Option Values
During the fiscal year ended March 31, 2000 the named executive
officers did not exercise any options issued by PetMedExpress. The following
table sets forth information regarding stock options held as of March 31, 2000
by the named executive officers:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money options at
March 31, 2000 March 31, 2000(1)
-------------- -----------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Marc A. Puleo,
M.D., Chief Executive
Officer, Chairman 1,140,000 600,000
</TABLE>
(1) The value per option is calculated by subtracting the exercise price of
the option from the fair market value of our common stock of $2.88 per
share on March 31, 2000 as reported on the OTC Bulletin Board on that
day.
40
<PAGE>
Employment Agreements
In May 2000, we entered into a two year employment agreement with Dr.
Puleo to serve as our chief executive officer. Under the terms of the employment
agreement:
- Dr. Puleo receives an annual salary of $150,000, subject to
increase upon an annual review by our board of directors,
- 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" (as defined in his employment agreement). If we terminate
Dr. Puleo without cause, we are obligated to grant Dr. Puleo 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.
Dr. Puleo is subject to customary non-disclosure provisions, as well as
a provision restricting competition for a period of 18 months 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 $140,000, 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 anniversaries of the date of the employment agreement.
These options are exercisable for a period of five years from their respective
vesting dates,
- Mr. Lloyd can participate in any profit-sharing or retirement
plan and in other employee benefits applicable to our employees and executives
and we pay for Mr. Lloyd's automobile expenses,
- 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 without "good reason" as described
below, 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
41
<PAGE>
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," which includes the following:
- our significantly changing the nature or scope of his
authorities, powers, functions, duties or
responsibilities, or his failing to be elected to the
board of directors,
- our materially breaching any of the terms of his
employment agreement,
- our materially reducing his benefits if the reduction
is not affected for all our executive employees,
- a successor company failing to assume our obligations
under his employment agreement, or
- the relocation of our principal offices outside
Broward or Palm Beach counties in Florida.
In the event Mr. Lloyd terminates his employment agreement
with good reason, he is entitled to receive a lump sum payment equal to the
balance of his base compensation for the remainder of the term of the employment
agreement, he shall continue to receive his benefits 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 PetMed Express, 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, he shall continue to receive his benefits for the
remainder of the term of his employment agreement and any previously granted but
unvested options shall immediately vest.
- The employment agreement contains customary non-disclosure
provisions, as well as a non-compete restriction for a period of 18 months
following the termination of the agreement.
In March 2000, we entered into a two year employment agreement with Mr.
Vermaaten to serve as our chief financial officer. Under the terms of the
employment agreement:
42
<PAGE>
- Mr. Vermaaten receives an annual salary of $120,000, subject
to increase upon an annual review by our board of directors;
- Mr. Vermaaten was granted options to acquire an aggregate of
100,000 shares of our common stock, at $3.125 per share, which vest at the rate
of 33,000 options on the date of the agreement, 33,000 options on the first
annual anniversary of the date of the agreement and 34,000 options on the second
annual anniversary of the date of the agreement. These options are exercisable
for a period of five years from their respective vesting dates;
- Mr. Vermaaten can participate in any profit-sharing or
retirement plan and in other employee benefits applicable to our employees and
executives, and we pay for Mr. Vermaaten's automobile expenses;
- We can terminate the employment of Mr. Vermaaten with or
without cause. If we should terminate Mr. Vermaaten for cause, or if Mr.
Vermaaten should terminate his agreement without "good reason" as described
below, no severance benefits shall be paid. If we should terminate Mr. Vermaaten
without cause, we must give him three months notice and continue to compensate
him under the terms of his employment agreement during those three months. At
the end of the three month period, we must pay Mr. Vermaaten severance benefits
in a lump sum equal to the balance of his base compensation for the remainder of
the term of his employment agreement, and he shall continue to receive his
executive benefits for the balance of the term of his agreement and any
previously granted but unvested options shall immediately vest.
- Mr. Vermaaten is also entitled to terminate his employment
agreement for "good reason." The employment agreement provides that "good
reason," which includes the following:
- our significantly changing the nature or scope of his
authorities, powers, functions, duties or
responsibilities,
- our materially breaching any of the terms of his
employment agreement,
- our materially reducing his benefits if the reduction
is not affected for all our executive employees,
- a successor company failing to assume our obligations
under his employment agreement, or
- the relocation of our principal offices outside
Broward or Palm Beach counties in Florida.
43
<PAGE>
In the event of termination with good reason, Mr. Vermaaten is
entitled to receive a lump sum payment equal to the balance of his base
compensation for the remainder of the term of his employment agreement, he shall
continue to receive his benefits for the remainder of the term of the agreement
and any previously granted but unvested options shall immediately vest.
- If we should terminate Mr. Vermaaten's agreement at
or within 12 months following a change in control of PetMed Express, as defined
in his 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 his employment agreement, he shall continue to receive his benefits for
the remainder of the term of his employment agreement and any previously granted
but unvested options shall immediately vest.
- The employment agreement contains customary non-disclosure
provisions, as well as a non-competition restriction for a period of 18 months
following the termination of the agreement.
Stock Options
Options Agreements
Before we adopted our 1998 Stock Option Plan in July 1998, we granted
options independent of any plan for the purchase of up to 1,113,000 shares of
common stock, as follows:
- options granted to Dr. Puleo to purchase:
- 300,000 shares of common stock at $.163 per
share, currently exercisable until May 2002,
and
- 240,000 shares of the common stock at $1.00
per share, currently exercisable until May
2002, and
- options granted to a non-employee principal shareholder of
PetMed Express to purchase 300,000 shares of common stock at
$.37 per share, currently exercisable 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, of which 88,501 are
currently exercisable and 40,501 and 40,498 may not be
exercised until April 2000 and April 2001, respectively; and
44
<PAGE>
- 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, currently
exercisable until July 2002. This includes options to purchase
22,500 shares at $1.33 per share granted to an affiliate of
Atlas, Pearlman, P.A., counsel for PetMed Express.
1998 Stock Option Plan
The 1998 Stock Option Plan, adopted July 1998, provides for the grant
of options to purchase up to 3 million shares to key employees, including
officers, and to non-employee directors and consultants. The purpose of this
plan is to attract and retain persons eligible to participate in the plan,
motivate participants to achieve our long-term goals by further aligning the
interests of participants with those of our stockholders through compensation
that is directly linked to the profitability of our business and increases in
stockholder value. These options are intended to qualify either as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code, or
as non-statutory stock options, which are options that are not intended to meet
the requirements of that section of the Internal Revenue Code.
The plan is administered by the compensation committee. Under the plan,
our compensation committee has the authority to determine:
- the persons to whom options will be granted,
- the number of shares to be covered by each option,
- exercise price of each option,
- whether the options granted are intended to be incentive stock
options,
- the manner of exercise, and
- the time, manner and form of payment upon exercise of an
option.
Incentive stock options granted under the plan may not be granted at a
price less than the fair market value of our common stock on the date of grant
(or less than 110% of the fair market value in the case of employees holding 10%
or more of our voting stock). Non-statutory options may be granted at an
exercise price established by our board of directors, but cannot be less than
par value per share ($.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.
45
<PAGE>
With respect to an aggregate of approximately 775,000 options granted
under the option plan, upon the effectiveness 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 is that our stockholders immediately preceding
the transaction own, after the consummation of the business combination, less
than 51% of our then issued and outstanding voting securities, then, all of the
options not previously vested will immediately vest and become exercisable.
As of March 31, 2000, options to purchase 2,122,500 shares of our
common stock, at exercise prices ranging from $1.25 to $6.125 per share, were
outstanding under our 1998 Stock Option Plan.
Limitation of Liability and Indemnification Matters
Our amended and restated articles of incorporation contain provisions
which eliminate the personal liability of our directors to us or our
stockholders for monetary damages for breach of their fiduciary duty as a
director to the fullest extent permitted by the Florida Business Corporations
Act, except for liability:
- for any breach of their duty of loyalty to us or our
stockholders;
- for act or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock
repurchases or redemptions; or
- for any transaction from which the director derived an
improper personal benefit.
These provisions do not affect a director's responsibilities under any other
laws, including the federal securities laws and state and federal environmental
laws.
Item 11. Security Ownership of Certain Beneficial Owners and Management
As of July 7, 2000, there are 6,385,010 shares of our common stock
issued and outstanding. These securities represent all of our issued and
outstanding voting securities. The following table sets forth, as of the close
of business on July 7, 2000, (a) the name, address and number of shares of each
person known by us to be the beneficial owner of more than 5% of the class of
stock; and (b) the number of shares of these securities owned by each director
and all officers and directors as a group, together with their respective
percentage holdings of such shares. Beneficial ownership is determined in
accordance with the rules of the SEC, and generally includes voting or
investment power with respect to securities and includes any securities which
the person has the right to acquire within 60 days of July 7, 2000 through the
conversion or
46
<PAGE>
exercise of any security or other right. Except as otherwise specifically set
forth herein, the following tables give no effect to the exercise of any
outstanding stock options or warrants. Unless otherwise indicated, the address
for each person is 1441 SW 29 Avenue, Pompano Beach, Florida 33069.
Shares Beneficially
Name of Owned
Beneficial Owner(1) Number Percent
--------------------------------------------------------------------------------
Marc Puleo, M.D. 4,432,500 69.4%
Chris Lloyd 1,562,250 24.5%
John Vermaaten 33,000 *
Gian Fulgoni 25,000 *
Edward Bottum - -
William Weaver - -
Lynda Reitzenstein 450,000 7.0%
Marpul Trust 1,496,250 23.4%
Double Diamond
Trading, Inc. 1,796,250 28.1%
Jeffrey Puleo 336,652 5.3%
All officers and
directors of
as a group
(six persons) 4,526,500 70.9%
* represents less than 1%
- Marpul Trust is a trust established by Dr. Puleo under an
agreement dated Septemb er 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:
47
<PAGE>
- 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,
- 1,496,250 shares owned by Double Diamond Trading,
Inc. over which Dr. Puleo holds voting control until
December 29, 2001, which may be extended an
additional two years 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 $.37 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.
- Mr. Lloyd's holdings include:
- options held by him to purchase 150,000 shares of
common stock at $2.75 per share until January 2006;
- 1,496,250 shares owned by Marpul Trust of which Mr.
Lloyd has shared voting power.
- The amount beneficially owned by Mr. Lloyd exclude options to
purchase a total of 230,000 shares of common stock at prices ranging from $2.75
to $4.50 per share which have not yet vested.
- Mr. Vermaaten's holdings include options to purchase 33,000
shares of our common stock, but excludes options to purchase an additional
67,000 shares of our common stock which have not yet vested.
- Mr. Fulgoni's holdings exclude options to purchase 60,000
shares of our common stock at $6.50 per share, which have not yet vested.
- Mr. Bottum's holdings exclude options to purchase 60,000
shares of our common stock at $6.50 per share, which have not yet vested.
48
<PAGE>
- Mr. Weaver's holdings exclude options to purchase 60,000
shares of our common stock at $6.50 per share, which have not yet vested.
- Ms. Reitzenstein's holdings include options to purchase 75,000
shares of our common stock at $3.25 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 $.37 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. Jeffrey Puleo's address is 333 West Hubbard Street,
Chicago, Illinois 60610. Mr. Jeffrey Puleo is Dr. Marc Puleo's brother.
Item 12. Certain Relationships and Related Transactions
In December 1998, Dr. Puleo advanced us $100,000 to be used as a
deposit on the purchase of the building and the real property on which our
principal offices are located. The advance was repaid without interest in
February 1999.
In February 1999, we borrowed $1,950,000 from Dr. Puleo's father to
purchase the building and the real property on which our principal offices are
located. The loan was unsecured and accrued interest at the rate of 15% per
annum. The note was renewed as of March 31, 1999 for a two year period with an
annual interest rate of 15% during the month of April 1999 and 12% thereafter.
On May 30, 1999, $1.5 million of the note was repaid with the proceeds from a
mortgage on the building and land obtained by us from a commercial bank. The
balance was repaid in October 1999.
We purchased printing and mailing services during the years ended March
31, 1999 and March 31, 2000 of approximately $97,856 and $0, respectively from
Dynamic Press, Inc. Dr. Puleo served as vice president of marketing of this
company from June 1997 until June 1998.
We believe transactions with our officers, directors and principal
stockholders have been made upon terms no less favorable to us that we might
receive from unaffiliated third parties.
We have adopted a policy whereby all transactions between us and one or
more of our affiliates must be approved in advance by a majority of our
disinterested directors.
49
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
The following documents are filed as a part of this report or are
incorporated by reference to previous filings, if so indicated:
<TABLE>
<CAPTION>
Exhibit Description of Document Page No.
------- ----------------------- --------
<S> <C> <C>
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 Second Amended and Restated Employment Agreement with Marc A.
Puleo(2)
10.2 Employment Agreement with Christopher 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 Agreement with South Trust Bank, N.A.(1)
10.13 Professional Services Agreement(1)
10.14 Letter Agreement with South Trust Bank, N.A.(2)
10.15 Employment Agreement with John Vermaaten(2)
16 Letter from Keefe, McCullough & Co. regarding change in certifying
accountants (1)
21 Subsidiaries of the registrant(1)
27 Financial Data Schedule(2)
(1) Incorporated by reference to the Registration Statement on Form 10-SB, File No.
000-28827, as amended, as filed with the Securities and Exchange Commission.
</TABLE>
50
<PAGE>
(2) Filed herewith.
(b) Reports on Form 8-K
None.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, PetMed Express, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PetMed Express, Inc.
By: /s/ Christopher Lloyd
------------------------------------
President, Chief Operating Officer and
Director
By: /s/ John Vermaaten
-----------------------------------
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Marc A. Puleo Chief Executive July 14, 2000
---------------------------- Officer and
Marc A. Puleo, M.D. Chairman of the Board
/s/ Christopher Lloyd President, Chief July 14, 2000
-------------------------------- Operating Officer and
Christopher Lloyd Director
/s/ Gian Fulgoni Director July 14, 2000
------------------------------
Gian Fulgoni
/s/ Director July , 2000
------------------------------
Edward Bottum
/s/ William Weaver Director July 14, 2000
------------------------------
William Weaver
</TABLE>
52
<PAGE>
Consolidated Financial Statements
PetMed Express, Inc.
and Subsidiary
Years ended March 31, 1999 and 2000
with Report of Independent Auditors
<PAGE>
PetMed Express, Inc. and Subsidiary
Consolidated Financial Statements
Years ended March 31, 1999 and 2000
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors....................................................................................F-1
Consolidated Financial Statements
Consolidated Balance Sheet as of March 31, 2000...................................................................F-2
Consolidated Statements of Operations for the years ended March 31,
1999 and 2000..................................................................................................F-4
Consolidated Statement of Changes in Stockholders' Equity for the
years ended March 31, 1999 and 2000............................................................................F-5
Consolidated Statements of Cash Flows for the years ended March 31,
1999 and 2000..................................................................................................F-6
Notes to Consolidated Financial Statements........................................................................F-8
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors
PetMed Express, Inc.
and Subsidiary
We have audited the accompanying consolidated balance sheet of PetMed Express,
Inc. and subsidiary as of March 31, 2000, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended March 31, 1999 and 2000. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PetMed Express,
Inc. and subsidiary at March 31, 2000, and the results of its operations and its
cash flows for the years ended March 31, 1999 and 2000, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As more fully described in Note 2, the Company
has incurred an operating loss and negative cash flows from operations for the
year ended March 31, 2000. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
West Palm Beach, Florida ----------------------
June 22, 2000 Ernst & Young LLP
F-1
<PAGE>
PetMed Express, Inc. and Subsidiary
Consolidated Balance Sheet
March 31, 2000
Assets
Current assets:
Cash and cash equivalents $ 311,846
Certificate of deposit 300,000
Accounts receivable, less allowance for
doubtful accounts of $28,747 187,873
Inventories 1,752,696
Prepaid expenses and other current assets 350,544
----------
Total current assets 2,902,959
Property and equipment, net 3,306,568
Other assets, net 116,908
----------
Total assets $6,326,435
==========
See accompanying notes.
F-2
<PAGE>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,282,633
Line of credit 776,200
Current portion of capital lease obligations 185,720
Current portion of mortgage payable 65,140
Current portion of other liabilities 100,000
Accrued expenses 95,048
-----------
Total current liabilities 2,504,741
Deferred membership fee revenue 273,398
Other liabilities, less current portion 110,000
Capital lease obligations, less current portion 240,672
Mortgage payable, less current portion 1,566,772
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,
2000 with a liquidation preference of $4 per share 22,246
Common stock, $.001 par value, 20,000,000 shares authorized;
6,369,822 shares issued and outstanding at March 31, 2000 6,370
Additional paid-in capital 4,572,385
Accumulated deficit (2,970,149)
-----------
Total stockholders' equity 1,630,852
-----------
Total liabilities and stockholders' equity $ 6,326,435
===========
F-3
<PAGE>
PetMed Express, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended March 31
1999 2000
----------------------------
<S> <C> <C>
Sales $10,224,178 $14,677,146
Cost of sales 6,120,584 8,496,316
----------------------------
Gross profit 4,103,594 6,180,830
----------------------------
Operating expenses:
General and administrative 2,912,244 5,926,851
Advertising 867,160 1,444,065
Depreciation and amortization 96,779 395,469
----------------------------
Total operating expenses 3,876,183 7,766,385
----------------------------
Income (loss) from operations 227,411 (1,585,555)
Other income (expense):
Interest expense (57,714) (229,055)
Interest income 15,577 34,724
Other, net 117,862 (14,351)
----------------------------
Income (loss) before provision for income taxes 303,136 (1,794,237)
Provision for income taxes - -
----------------------------
Net income (loss) 303,136 (1,794,237)
Accretion for beneficial conversion feature of
preferred stock 771,525 -
----------------------------
Net loss available to common stockholders $ (468,389) $(1,794,237)
============================
Basic and diluted loss per common
share $ (0.09) $ (0.28)
============================
Weighted average number of common shares
outstanding 5,333,355 6,369,822
============================
</TABLE>
See accompanying notes.
F-4
<PAGE>
PetMed Express, 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>
Balance at March 31, 1998 - $ - 4,787,499 $4,787
Sale of convertible preferred stock, net of issuance costs 250,000 116,288 - -
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 - - - -
Warrants issued in exchange for services - - - -
Sale of common stock - - 3,000 3
In-kind contribution of services - - - -
Net loss - - - -
-----------------------------------------------------------
Balance at March 31, 2000 6,250 $ 22,246 6,369,822 $6,370
===========================================================
</TABLE>
[RESTUBBED]
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
-----------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1998 $1,934,254 $(1,479,048) $ 459,993
Sale of convertible preferred stock, net of issuance costs 771,525 - 887,813
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 144,000 - 144,000
Warrants issued in exchange for services 213,150 - 213,150
Sale of common stock 8,997 - 9,000
In-kind contribution of services 100,000 - 100,000
Net loss - (1,794,237) (1,794,237)
-----------------------------------------
Balance at March 31, 2000 $4,572,385 $(2,970,149) $1,630,852
=========================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
PetMed Express, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended March 31
1999 2000
---------------------------------
<S> <C> <C>
Operating activities
Net income (loss) $ 303,136 $(1,794,237)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 87,434 351,123
Amortization 9,345 44,346
Amortization of deferred membership fee revenue (427,871) (565,446)
Interest expense added to capital lease obligation -- 20,129
Provision for doubtful accounts 1,640 133,218
Issuance of stock options in settlement of litigation -- 144,000
In-kind contribution of services 80,000 100,000
Issuance of common stock and options in exchange
for services 138,160 -
Issuance of common stock in exchange for employee services 22,672 -
Warrants issued in exchange for services -- 213,150
Changes in operating assets and liabilities:
Accounts receivable (21,081) (6,400)
Inventories (1,108,016) (175,983)
Prepaid expenses and other current assets 23,994 (256,263)
Accounts payable 139,029 844,386
Other liabilities -- 210,000
Accrued expenses (7,491) (90,579)
Deferred membership fee revenue 580,872 511,315
----------------------------------
Net cash used in operating activities (178,177) (317,241)
----------------------------------
Investing activities
Purchases of property and equipment (2,669,192) (552,096)
Certificate of deposit -- (300,000)
Other assets (36,321) (66,084)
----------------------------------
Net cash used in investing activities (2,705,513) (918,180)
----------------------------------
</TABLE>
Continued on next page.
F-6
<PAGE>
PetMed Express, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended March 31
1999 2000
------------------------------------
<S> <C> <C>
Financing activities
Net proceeds from sale of common stock $ 783,167 $ 9,000
Exercise of stock options -- 247,998
Proceeds from sale of convertible preferred stock 88,523 --
Payments on capital lease obligations (23,835) (95,959)
Borrowings under line of credit agreement -- 776,200
Payments on mortgage payable -- (48,088)
Borrowings (repayments) under note payable to related party 1,950,000 (1,950,000)
Proceeds from mortgage payable -- 1,680,000
Proceeds from capital lease obligations -- 242,367
-----------------------------------
Net cash provided by financing activities 2,797,855 861,518
-----------------------------------
Net decrease in cash and cash equivalents (85,835) (373,903)
Cash and cash equivalents at beginning of fiscal year 771,584 685,749
-----------------------------------
Cash and cash equivalents at end of fiscal year $ 685,749 $ 311,846
===================================
Supplemental disclosure of cash flow information
Cash paid for interest $ 57,714 $ 192,197
===================================
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 $ -- $ 243,328
===================================
Preferred stock issued to subscription receivable holders $ 799,290 $ --
===================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements
March 31, 2000
1. Summary of Significant Accounting Policies
Organization
PetMed Express, 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 fiscal
2000, the Company changed its name to PetMedExpress.com, Inc. and then
subsequently changed its name back to PedMed Express, Inc.
During April 1999, the Company acquired, at nominal cost, the outstanding common
stock of an affiliate that had an immaterial amount of assets and liabilities.
The Company had previously utilized the services of the affiliate for purchasing
purposes.
The Company's fiscal year end is March 31. References herein to fiscal 1999 or
2000 refer to the Company's fiscal years ended March 31, 1999 and 2000,
respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of PetMed Express,
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.
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.
F-8
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Certificate of Deposit
The Company's certificate of deposit (CD) is being accounted for as an
available-for-sale security in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The CD is reported at fair value,
which approximates book value, with unrealized gains and losses recognized as a
separate component of stockholders' equity. The Company had no realized gains or
losses as a result of securities transactions during fiscal 1999 or 2000. The CD
has been pledged through December 24, 2000 as collateral against the Company's
mortgage payable as more fully described in Note 5.
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.
F-9
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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.
During fiscal 2000, the Company purchased software, a portion of which was
financed through a capital lease obligation. Subsequent to installation,
management determined that the software was not adequate for either the
Company's current or future needs. The Company was not able to return the
software to the vendor nor was it saleable. Accordingly, the Company wrote-off
the $78,303 net book value of the software in fiscal 2000. Such amount is
included in depreciation and amortization expense in the accompanying statement
of operations.
Research and Development
The Company has contracted with a pharmaceutical research firm to develop
generic forms of certain of the Company's pet medication product offerings.
Research and development costs related to the development of these items are
being expensed as incurred.
During the year ended March 31, 2000, the Company incurred approximately $31,100
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 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.
F-10
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Accounting for Stock-Based Compensation
The Company accounts for employee stock options using the intrinsic value method
as prescribed by Accounting Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees. The Company follows the disclosure provisions of
SFAS No. 123, Accounting for Stock-Based Compensation 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 that make their resale uncompetitive in the marketplace, it could have
a 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 plan to produce generic
forms of this medication.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, certificate of
deposit, 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.
F-11
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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.
Reclassifications
Certain reclassifications have been made to the 1999 statement of operations to
conform to the 2000 presentation.
In May 2000, EITF 00-10 Accounting for Shipping and Handling Fees and Costs was
issued. EITF 00-10 requires that costs incurred by the seller for shipping and
handling should be classified as a cost of sales. Accordingly, the Company
reclassified $474,397 and $649,605 of shipping and handling costs from general
and administrative to cost of sales for fiscal 1999 and 2000, respectively, in
the accompanying statements of operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (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. Going Concern and Management's Plans
For the year ended March 31, 2000, the Company has incurred significant
operating losses and a cash flow deficiency. These financial statements have
been prepared assuming that the Company will continue as a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. The Company had an operating loss of $1,585,555 for
the year ended March 31, 2000 and negative cash flow from operations of
$317,241. In addition, the Company was in violation of certain of its debt
covenants at March 31, 2000.
F-12
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Going Concern and Management's Plans (continued)
As a result, the Company is dependent upon capital from outside sources in order
to fund future operations. These matters raise substantial doubt about the
entity's ability to continue as a going concern. These financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
Management is actively seeking to raise additional capital through the sale of
equity securities and through the possible sale and leaseback of its land and
building. In addition, management has a plan whereby certain nonessential
personnel and administrative costs may be reduced so that the Company may
continue to meet its operating and financing obligations as they come due. No
assurances can be given that the Company will be successful in obtaining
additional capital, or that such capital will be available in terms acceptable
to the Company. Further, there can be no assurance that even if such additional
capital is obtained or the planed cost reductions are implemented that the
Company will achieve profitability or positive cash flow.
3. Property and Equipment
Major classifications of property and equipment are as follows:
March 31
2000
------------
Land $ 863,758
Building 1,390,475
Computer software 429,525
Furniture, fixtures and equipment 499,829
Equipment and software under capital leases 531,413
----------
3,715,000
Less accumulated depreciation 408,432
----------
$3,306,568
==========
Amortization expense for equipment and software under capital leases was $15,637
and $92,753 for fiscal 1999 and 2000, respectively.
F-13
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. Capital Leases
The Company leases equipment under capital lease agreements with outside third
parties. Future payments under capital leases with initial terms of one year or
more consisted of the following at March 31, 2000:
Year ended March 31:
2001 $218,077
2002 233,678
2003 24,394
2004 2,465
--------
478,614
Amount representing interest 52,222
--------
426,392
Less current portion 185,720
--------
$240,672
========
In March 2000, the Company's capital lease obligation was increased by $20,129
for fees and interest which were incurred by the Company while disputing certain
aspects of the leases. Such amount is included in interest expense in the
accompanying consolidated statement of operations.
Included in the amount owed under the Company's capital lease obligation is
approximately $61,258 which relates to software which was written-off during
fiscal 2000 and is no longer in use by the Company (see Note 1).
5. 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 that are used as the Company's
headquarters and warehouse. The mortgage is for a seven year period with 20 year
amortization period 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 9).
14
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. Mortgage Payable and Line of Credit Agreement (continued)
Future payments due under the mortgage payable consisted of the following at
March 31, 2000:
Year ended March 31:
2001 $ 65,140
2002 70,445
2003 76,185
2004 82,102
2005 89,083
Thereafter 1,248,957
-----------
$ 1,631,912
===========
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% (10.0% at March 31, 2000). The line
of credit is secured by substantially all the assets of the Company. At March
31, 2000, $776,200 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. At March 31, 2000, the
Company was in violation of certain of its financial covenants, including those
which had been previously amended. The Company obtained waivers/amendments in
July 2000, which suspended the fixed charge coverage, working capital and bank
debt to adjusted net worth requirements of the covenants through April 1, 2001.
Had these waivers not been obtained, the Company would have been in default of
its mortgage and line of credit at March 31, 2000. The restriction to maintain
the $300,000 of additional collateral expires no later than December 24, 2000.
6. Stockholders' Equity
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.
F-15
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. Stockholders' Equity (continued)
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 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 March 31, 2000, 6,250 shares of the convertible preferred
stock remained unconverted and outstanding.
F-16
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. Stockholders' Equity (continued)
In-Kind Contribution of Services
During fiscal 1999 and 2000, the Company's President and Chief Executive Officer
(CEO) did not receive a salary for services 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.
7. 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 operation 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 taxes are as follows:
Year ended March 31
1999 2000
----------------------------
Deferred tax assets:
Depreciation $ -- $ --
Bad debts and inventory reserves 1,448 34,664
Deferred compensation (stock options) 254,881 231,400
Amortization of intangible assets 751 7,411
Accrued expenses 37,630 47,010
Net operating loss carryforward 72,145 1,284,198
----------------------------
Deferred tax assets 366,855 1,604,683
Less valuation allowance (357,663) (1,527,985)
----------------------------
Total deferred tax assets 9,192 76,698
Deferred tax liabilities:
Depreciation (9,192) (76,698)
----------------------------
Total net deferred taxes $ -- $ --
============================
F-17
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
Management has determined that a $1,527,985 valuation allowance is necessary at
March 31, 2000, 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 year ended March 31, 2000, is
$1,170,322. At March 31, 2000, the Company had net operating loss carryforwards
of $3,412,700, 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:
Year ended March 31
1999 2000
----------- -----------
Tax at U.S. statutory rates $ 130,266 $ (610,041)
State income taxes, net of federal tax benefit 14,657 (65,131)
Tax deduction from exercise of stock options -- (480,078)
Nondeductible items 7,017 34,549
Change in valuation allowance (156,951) 1,170,322
Other 5,011 (49,621)
----------- -----------
$ - $ -
=========== ===========
8. 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 common stock
as of the date of issuance. The Company had 2,122,500 options outstanding under
the Plan at March 31, 2000. Options issued prior to July 31, 1998 are not
included in the Plan.
F-18
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. Stock Options (continued)
The weighted average fair value per share of options granted by the Company in
fiscal 1999 and 2000 was $1.03 and $2.49, respectively.
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>
Fiscal 1999 Fiscal 2000
----------------------------------------------------------------
Weighted Weighted
Average Average
Number Exercise Price Number Exercise Price
of Shares Per Share of Shares Per Share
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 1,410,000 $0.746 3,113,400 $1.222
Granted 2,093,400 1.315 1,126,500 3.820
Exercised - - 246,000 1.010
Canceled 390,000 2.736 288,400 3.640
----------------------------------------------------------------
Outstanding at end of period 3,113,400 $1.222 3,705,500 $1.840
================================================================
Exercisable at end of period 2,212,500 $0.996 2,322,450 $1.310
================================================================
</TABLE>
The following table sets forth additional information about stock options
outstanding at March 31, 2000:
<TABLE>
<CAPTION>
Number Weighted Number
Outstanding Average Weighted Exercisable
Range of as of March 31, Remaining Contractual Average as of March 31,
Exercise Prices 2000 Life Exercise Price 2000
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$0.16 - $2.00 2,613,000 2.66 years $1.02 1,940,850
$2.38 - $4.50 912,500 4.34 years $3.34 381,600
$6.13 - $6.50 180,000 9.33 years $6.13 -
------------------------ ------------------------
3,705,500 3.40 years 2,322,450
</TABLE>
F-19
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. Stock Options (continued)
The value of all options granted during fiscal 1999 and 2000, was computed using
the Black Scholes option pricing model as prescribed by SFAS No. 123 and the
following weighted average assumptions:
Year ended March 31
1999 2000
-------------------------
Risk-free interest rate 6.00% 6.00%
Expected dividend yield 0.00% 0.00%
Expected lives 1-5 1-5
Expected volatility .779 .920
Adjustments are made for options forfeited prior to vesting.
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:
Year ended March 31
1999 2000
-----------------------------
Pro forma net loss $ (835,229) $(2,102,882)
Accretion for beneficial conversion
feature of preferred stock (771,525) -
----------- -----------
Pro forma net loss available to
common stockholders $(1,606,754) $(2,102,882)
=========== ===========
Pro forma net loss per common share $ (.30) $ (.33)
=========== ===========
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 fiscal
2000, the 240,000 options were exercised.
F-20
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. Stock Options (continued)
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.
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 $144,000 in accordance with SFAS No.
123. The expense related to this settlement is included in general and
administrative expenses in the accompanying statement of operations.
During fiscal 2000, the Company granted warrants to purchase 75,000 shares of
its common stock to an investment advisory firm in exchange for investment
banking related services. 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 No. 123. The Company recorded such item as a contra-equity
item, since the related services were expected to be utilized as part of an
equity-related transaction. Upon determining the transaction would not be
completed as anticipated, such amount was expensed and included as part of
general and administrative in the fiscal 2000 statement of operations.
In March 2000, the Company gave $50,000 and granted warrants to purchase 20,000
shares of its common stock in exchange for termination of an agreement between
the Company and an investment banking firm. The warrants are exercisable at
$3.125 per share and expire one year from date of grant. The Company valued the
warrants at $23,400 in accordance with SFAS No. 123. Such amounts were expensed
in fiscal 2000 and are included in general and administrative expenses in the
accompanying statement of operations. The agreement gave the investment banking
firm right of first refusal on any future public or private debt or equity
offerings made by the Company, certain rights regarding Board of Director
representation and future grants of warrants to purchase the Company's common
stock.
F-21
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. Related Party Transactions
In February 1999, the Company borrowed $1,950,000 from the father of the
Company's President and 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 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 2000, 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 $6,000 and $4,500 during fiscal 1999 and 2000,
respectively.
The Company purchased 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 1999 and 2000, were $97,856 and $-0-,
respectively.
10. 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 and
warrants were not included in the calculation of earnings per share for fiscal
1999 and 2000 because their effect would have been antidilutive.
F-22
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. Valuation and Qualifying Accounts
Activity in the Company's Valuation and Qualifying accounts consists of the
following:
Year ended March 31
1999 2000
----------- -----------
Allowance for doubtful accounts:
Balance at beginning of period $ 5,489 $ 3,849
Provision for doubtful accounts 1,640 133,218
Write-offs of uncollectible accounts receivable (3,280) (108,320)
----------- -----------
Balance at end of period $ 3,849 $ 28,747
=========== ===========
Valuation allowance for deferred
tax assets:
Balance at beginning of period $ 514,614 $ 357,663
Additions -- 1,170,322
Deductions (156,951) --
----------- -----------
Balance at end of period $ 357,663 $ 1,527,985
=========== ===========
12. Commitments and Contingencies
During fiscal 2000 and subsequent thereto, complaints were filed against the
Company by four states in which the Company is licensed to dispense pet
medications. During fiscal 2000, three of these complaints were settled for
fines of $35,500 and costs of $10,671. Management is unable to determine what,
if any, potential liability may be incurred as a result of the ultimate outcome
of the remaining complaint.
In July 1999, the U.S. Food and Drug Administration (FDA) issued a warning
letter to PedMed Express 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.
F-23
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. Commitments and Contingencies (continued)
Litigation
The Company is involved in litigation arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
these matters will be resolved without material adverse effect on the Company's
results of operations or financial position.
Employment Agreements
In May 2000, the Company entered into a new employment agreement with its
President and Chief Executive Officer. The agreement expires in May 2002 and
contains provisions for nondisclosure, severance and benefits, and provides for
an eighteen month noncompete following termination of the agreement.
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 nondisclosure, 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 noncompete following termination of the agreement.
In March 2000, the Company entered into an employment agreement with its Chief
Financial Officer. The agreement expires in March 2002 and contains provisions
for nondisclosure, severance and benefits, the granting of 100,000 options at
$3.13 per share (the market price on date of grant) and provides for an eighteen
month noncompete following termination of the agreement.
In June 2000, the Company entered into an employment agreement with an
individual for future services as the Company's new chief executive officer. The
agreement is effective beginning September 18, 2000, expires in September 2003,
contains provisions for nondisclosure, severance and benefits, and provides for
an eighteen month noncompete following termination of the agreement. The
agreement also entitles the individual to 450,000 options to purchase shares of
the Company's common stock at $1.25 per share.
F-24
<PAGE>
PetMed Express, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. Commitments and Contingencies (continued)
Other
In June 2000, the Company agreed to pay $210,000 to two former employees who had
alleged wrongful termination by the Company. Of this amount, $60,000 is payable
in varying monthly installments from August 2000 through March 2001, $60,000 is
payable in $5,000 installments from August 2000 through August 2001, and the
remaining $90,000 is payable at the option of the Company in either common stock
of the Company due in total in September 2001, based upon the prevailing market
price of the Company's common stock, or in twelve equal monthly installments
beginning in September 2001. Such amounts have been expensed in fiscal 2000 as
part of general and administrative in the accompanying statement of operations.
The settlement is recorded as "Other liabilities" in the accompanying balance
sheet.
13. 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-25
INDEX TO EXHIBITS
Sequential
Exhibit Description of Document Page No.
------- ----------------------- --------
10.1 Second Amended and Restated Employment Agreement
with Marc A. Puleo
10.14 Letter Agreement with South Trust Bank, N.A.
10.15 Employment Agreement with John Vermaaten
27 Financial Data Schedule
