SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
____________________
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
____________________
Commission File Number: 000-28827
PETMED EXPRESS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 65-0680967
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1441 S.W. 29th Avenue, Pompano Beach, Florida 33069
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (954) 979-5995
Indicate by check [X] whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such requirements for the past 90 days.
[X] [ ]
Yes No
17,170,510 Common Shares, without par value
----------------------------------------------
(number of common shares outstanding as of the
close of business on July 31, 2002)
Transitional Small Business Disclosure Form (check one): Yes [ ] No [X]
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This discussion in this quarterly 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 quarterly
report.
When used in this quarterly report on Form 10-QSB, "PetMed Express," "PetMed
Express.com," "PetMed," "1-888-PetMeds," "the Company," "we," "our," and
"us" refers to PetMed Express, Inc. and our subsidiaries.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30,
2002
------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 229,003
Accounts receivable, less allowance for
doubtful accounts of $8,734 340,635
Inventories 4,299,055
Prepaid expenses and other current assets 159,049
------------
Total current assets 5,027,742
Property and equipment, net 1,351,853
Other assets, net 50,155
------------
Total assets $ 6,429,750
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 3,456,290
Current portion of loan obligation 68,442
------------
Total current liabilities 3,524,732
Line of credit 141,214
Loan obligation, less current portion 119,775
------------
Total liabilities 3,785,721
------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized; 2,500 convertible shares
issued and outstanding with a liquidation
preference of $4 per share 8,898
Common stock, $.001 par value, 40,000,000 shares
authorized; 16,960,010 shares issued and
outstanding 16,960
Additional paid-in capital 6,687,285
Accumulated deficit (4,069,114)
------------
Total shareholders' equity 2,644,029
------------
Total liabilities and shareholders' equity $ 6,429,750
============
See accompanying notes to condensed consolidated financial statements
2
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30,
2002 2001
------------- -------------
Sales $ 14,830,755 $ 5,363,650
Cost of sales 8,568,253 3,450,889
------------- -------------
Gross profit 6,262,502 1,912,761
------------- -------------
Operating expenses:
General and administrative 2,083,423 1,152,517
Advertising 2,807,180 1,347,653
Severance charges - 195,000
Depreciation and amortization 80,664 98,356
------------- -------------
Total operating expenses 4,971,267 2,793,526
------------- -------------
Income (loss) from operations 1,291,235 (880,765)
------------- -------------
Other income (expense):
Loss on disposal of property and equipment - (185,374)
Interest expense (5,590) (32,060)
Interest income 4,133 7,515
Other, net 2,335 -
------------- -------------
Total other income (expense) 878 (209,919)
------------- -------------
Income (loss) before provision for income taxes 1,292,113 (1,090,684)
Provision for income taxes 389,784 -
------------- -------------
Net income (loss) $ 902,329 $ (1,090,684)
============= =============
Net income (loss) per common share:
Basic $ 0.05 $ (0.07)
============= =============
Diluted $ 0.04 $ (0.07)
============= =============
Weighted average number of common shares
outstanding:
Basic 16,590,779 16,360,010
============= =============
Diluted 20,092,544 16,360,010
============= =============
See accompanying notes to condensed consolidated financial statements
3
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30,
2002 2001
------------- -------------
Cash flows from operating activities:
Net income (loss) $ 902,329 $ (1,090,684)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 80,664 96,273
Amortization of intangibles - 2,083
Amortization of deferred membership fee revenue - (60,397)
Loss on disposal of land and building - 185,374
Bad debt expense 1,728 3,799
(Increase) decrease in operating assets and
liabilities:
Accounts receivable (50,850) (60,540)
Inventory (1,992,435) (328,498)
Prepaid expenses and other current assets (10,441) 6,272
Other assets - (41,625)
Accounts payable and accrued expenses 731,295 720,205
------------- -------------
Net cash used in operating activities (337,710) (567,738)
------------- -------------
Cash flows from investing activities:
Net proceeds from the sale of property - 2,016,713
Purchases of property and equipment (312,461) (24,435)
------------- -------------
Net cash (used in) provided by investing activities (312,461) 1,992,278
------------- -------------
Cash flows from financing activities:
Payments on capital lease obligations - (17,581)
Proceeds from the exercise of stock options 159,000 -
Payments on loan obligation (17,110) -
Payments on mortgage payable - (1,566,833)
------------- -------------
Net cash provided by (used in) financing activities 141,890 (1,584,414)
------------- -------------
Net decrease in cash and cash equivalents (508,281) (159,874)
Cash and cash equivalents, at beginning of period 737,284 408,699
------------- -------------
Cash and cash equivalents, at end of period $ 229,003 $ 248,825
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 5,634 $ 12,737
============= =============
See accompanying notes to condensed consolidated financial statements
4
PETMED EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Summary of Significant Accounting Policies
Organization
PetMed Express, Inc. and subsidiaries is a leading nationwide pet
pharmacy. The Company delivers prescription and non-prescription pet
medications along with health and nutritional supplements at a savings
direct to the consumer, through the PetMed Express catalog, customer
service representatives and on the Internet through our web site at
www.1888PetMeds.com. The Company's nationwide pet pharmacy and
multi-channel approach provides attractive values for retail and
wholesale customers, including: convenience, costs savings, superior
customer service, enhanced shopping flexibility, ease of ordering and
reordering, and rapid home delivery. The Company's executive offices
are located in Pompano Beach, Florida.
The Company's fiscal year end is March 31, and references herein to
fiscal 2003 or 2002 refer to the Company's fiscal years ending March
31, 2003 and 2002, respectively.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-QSB
and, therefore, do not include all of the information and footnotes
required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion
of management, the accompanying condensed consolidated financial
statements contain all adjustments, consisting of normal recurring
accruals, necessary to present fairly the financial position of the
Company, after elimination of intercompany accounts and transactions,
at June 30, 2002, and the statements of operations for the three
months ended June 30, 2002 and cash flows for the three months ended
June 30, 2002. The results of operations for the three months ended
June 30, 2002, are not necessarily indicative of the operating results
expected for the fiscal year ending March 31, 2003. These financial
statements should be read in conjunction with the financial statements
and notes thereto contained in the Company's annual report on Form 10-
KSB for the fiscal year ended March 31, 2002. The condensed
consolidated financial statements include the accounts of PetMed
Express, Inc. and its wholly owned subsidiaries. All significant
intercompany transaction has been eliminated upon consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements in
conformity with generally accepted accounting principles in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
condensed consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Earnings (Loss) Per Share
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 and the effect of
convertible securities were not included in the calculation of diluted
loss per share for the three months ended June 30, 2001, because their
effect would have been antidilutive.
Note 2: Equity
In the first quarter of fiscal 2003, the Company received net proceeds
of $159,000 upon the exercise and issuance of 600,000 shares of common
stock, of which 300,000 shares were exercised by the Company's
President. Subsequent to the first quarter of fiscal 2003, the
Company received net proceeds of $75,663 upon the exercise and
issuance of 210,500 shares of common stock, of which 187,500 shares
were exercised by the Company's Chief Executive Officer.
5
Note 3: Commitments and Contingencies
Legal Matters
Various complaints have been filed with the Florida Board of Pharmacy.
These complaints, the majority of which were filed by veterinarians
who are in competition with the Company for the sale of pet
prescription-required products, allege violations of the Pharmacy
Practice Act and regulations promulgated thereunder. The vast
majority of the complaints allege that the Company, through its
pharmacists, improperly dispensed prescription-required veterinary
medication based on prescriptions verified through the Company's
alternate veterinarian program. The alternate veterinarian program
uses a veterinarian outside the state of Florida to verify
prescriptions for certain pets outside the state of Florida. While
the program is not used for pets residing in the state of Florida, the
complaints have, for the most part, been filed with the Florida Board
of Pharmacy. Other complaints allege the dispensing of medication
without a valid prescription, the sale of non-conforming products and
that the Company's pharmacy is operating at the same location as
another pharmacy, with which it has a contractual relationship. The
Company contested all allegations and continued discussions in an
attempt to reach a resolution of these matters.
In February 2002, the Company voluntarily ceased the use of its
alternate veterinarian program, and in March 2002 a business decision
was made to enter into a settlement agreement with the Florida Board
of Pharmacy, rather than to proceed with costly and lengthy
litigation. In April 2002, the Florida Board of Pharmacy approved the
settlement agreement. The Florida Board of Pharmacy did not reach any
finding of fact or conclusion of law that the Company committed any
wrongdoing or violated any rules or laws governing the practice of
pharmacy. According to the settlement agreement, the Company's
pharmacy license was placed on probation for a period of three years
and the Company, the Company's pharmacists and contracted pharmacy and
pharmacist, paid approximately $120,000 in fines and investigative
costs, in July 2002. The Company remains licensed with the State of
Florida and continues to operate its principal business in Florida.
Additional complaints have been filed with other states' Pharmacy
Boards. These complaints, the majority of which were filed by
veterinarians who are in competition with the Company for the sale of
pet prescription-required products, allege violations of the Pharmacy
Practice Act and regulations promulgated thereunder. The vast
majority of the complaints allege that the Company, through its
pharmacists, improperly dispensed prescription-required veterinary
medication based on prescriptions verified through the Company's
alternate veterinarian program. The Company contested all allegations
and continued discussions in an attempt to reach a resolution of these
matters.
In the first quarter of fiscal 2003, the Company reached settlement
agreements with the Louisiana, Missouri, New Mexico, and Ohio State
Pharmacy Boards. According to the settlement agreements, the Company
was required to terminate the alternate veterinarian program in the
state and the Company's permit was placed on probation. At June 30,
2002, the Company paid approximately $35,000 and has accrued $30,000
to cover any or all administrative fines and investigative costs
associated with these settlements. There can be no assurances made
that other states will not attempt to take similar actions against the
Company in the future.
In February 2000, the United States Environmental Protection Agency
("EPA") issued a Stop Sale, Use or Removal Order to the Company
regarding the alleged distribution or sale of misbranded Advantage
products in violation of the Federal Insecticide, Fungicide, and
Rodenticide Act ("FIFRA"), as amended. The order provides that the
company shall not distribute, sell, use or remove the products listed
in the order, which are allegedly misbranded. The order further
provides that the Company shall not commence any sale or distribution
of those products without the prior written approval from the EPA.
The Stop Sale, Use or Removal Order does not assert any claim for
monetary damages; rather, it is in the nature of a cease and desist
order. The Company denied any alleged violations. On February 16,
2000, the Company submitted a written response to the order. The EPA
assessed a fine in the amount of $445,000. In fiscal 2001 the Company
accrued $445,000 of legal settlement expense.
In September 2001, the Company and the EPA entered into a Consent
Agreement and Final Order ("CAFO"). The settlement agreement required
the Company to pay a civil penalty of $100,000 plus interest,
requiring a payment of $56,000 due on September 30, 2002 and $53,000
due on September 30, 2003, a reduction from the previously assessed
fine of $445,000. For the purpose of this CAFO, the Company admitted
to the jurisdictional allegations set forth, and neither admitted nor
denied the alleged violations. On September 28, 2001, the CAFO was
approved and ordered by the regional judicial officer.
6
On March 19, 2002, Novartis Animal Health U.S., Inc. ("Novartis")
filed a complaint against the Company and two other defendants in U.S.
District Court for the Southern District of Florida. Novartis
purports to assert seven (7) claims related to the Company's alleged
sale of pet medications produced for a Novartis Australian sister
company: Count I: Infringement of Registered Trademark Under Section
32 of the Lanham Act, 15 U.S.C. Sec. 1114; Count II: Infringement of
Unregistered Trademarks Under Section 43(a) of the Lanham Act, 15
U.S.C. Sec. 11125(a); Count III: False Advertising Under Section 43(a) of
the Lanham act, 15 U.S.C. Sec. 1125(a); Count IV: Misleading Advertising
Under Florida Statutory Law; Count V: Deceptive and Unfair Trade
Practices Under Florida Statutory Law; Count VI: Injury to Business
Reputation Under Florida Statutory Law; Count VII: Common Law Unfair
Competition.
The Company has answered the complaint and asserted defenses and
affirmative defenses. The parties have met pursuant to Rule 16, S.D.
Fla. L.R., and filed a proposed joint scheduling report. No discovery
has been propounded, and no documents have been produced. The parties
have engaged in preliminary settlement discussions; however, it is
unknown whether these discussions will result in an early settlement
of this matter. If not, the Company intends to defend itself
vigorously, and will likely assert counterclaims. Unless and until
the parties engage in substantial discovery, it is not possible to
evaluate the likelihood of an unfavorable outcome or estimate the
potential loss in the event of an adverse outcome at this time.
Routine Proceedings
The Company is a party to routine litigation incidental to its
business. The Company's management does not believe that the
resolution of any or all of such routine litigation is likely to have
a material adverse effect on the Company's financial condition or
results of operations.
7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Overview
PetMed Express was incorporated in the state of Florida in January
1996. From inception until approximately August 1996, the Company's
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. The Company began selling pet medications and products
in September 1996, and in the fall of 1997 the Company issued its
first catalog. This catalog displayed approximately 1,200 items,
including prescription and non-prescription pet medications, pet
health and nutritional supplements and pet accessories. The Company
has recently focused its product line to approximately 600 of the most
popular items for dogs and cats. The Company also markets products on
its web site. Since October 1997, the Company has advertised its
products on national television and through the direct mailing of
catalogs.
The Company's sales consist of products sold to mainly retail
consumers and minimal wholesale consumers. Typically, the Company's
retail customers pay by credit card or check at the time the order is
shipped. The Company usually receives cash settlement in one to three
banking days for sales paid for by credit cards, which minimizes the
accounts receivable balances relative to the Company's sales. Certain
wholesale customers are extended credit terms, which usually require
payment within 30 days of delivery. To date, the Company's sales
returns average approximately 2% of sales, and the current average
purchase is approximately $70.
Critical Accounting Policies
Our discussion and analysis of our financial condition and the results
of our operations are based upon our condensed consolidated financial
statements and the data used to prepare them. The Company's condensed
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America. On an ongoing basis we re-evaluate our judgements and
estimates including those related to product returns, bad debts,
inventories, long-lived assets, income taxes, litigation and
contingencies. We base our estimates and judgements on our historical
experience, knowledge of current conditions and our beliefs of what
could occur in the future considering available information. Actual
results may differ from these estimates under different assumptions or
conditions. Our estimates are guided by observing the following
critical accounting policies.
Revenue recognition
We generate our revenue by selling pet medication products to mainly
retail consumers and minimal wholesale consumers. Our policy is to
recognize revenue from product sales upon shipment, when the rights
and risk of ownership have passed to the consumer. Outbound shipping
and handling fees are included in sales and are billed upon shipment.
Shipping and handling expenses are included in cost of sales.
The majority of our sales are paid by credit cards and we usually
receive the cash settlement in one to three banking days. Credit card
sales minimize our account receivable balances relative to our sales.
We maintain an allowance for doubtful accounts for losses that we
estimate will arise from our customers' inability to make required
payments. We make our estimates of the uncollectibility of our
accounts receivable by analyzing historical bad debts and current
economic trends. At June 30, 2002 the allowance for doubtful accounts
was $8,734.
Valuation of inventory
Inventories consist of prescription and non-prescription pet
medications that are available for sale and are priced at the lower of
cost or market value using a weighted average cost method. We write
down our inventory for estimated obsolescence.
Property and equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
The furniture, fixtures, equipment and computer software are
depreciated over periods ranging from three to ten years. Leasehold
improvements and assets under capital lease agreements are amortized
over the shorter of the underlying lease agreement or the useful life
of the asset.
8
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.
Advertising
The Company's advertising expense consists primarily of television
advertising, catalog and postcard production, and mailing costs.
Television costs are expensed as the ads are televised and catalog and
postcard costs are expensed when the related catalog and postcards are
produced, distributed or superseded.
Accounting for income taxes
The Company accounts for income taxes under the provisions of SFAS No.
109, Accounting for Income Taxes, which generally requires recognition
of deferred tax assets and liabilities for the expected future tax
benefits or consequences of events that have been included in the
condensed consolidated financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on
differences between the financial reporting carrying values and the
tax bases of assets and liabilities, and are measured by applying
enacted tax rates and laws for the taxable years in which those
differences are expected to reverse.
Results of Operations
The following should be read in conjunction with the Company's
condensed consolidated financial statements and the related notes
thereto included elsewhere herein. The following table sets forth, as
a percentage of sales, certain items appearing in the Company's
condensed consolidated statements of operations.
Three Months Ended
-------------------------------
June 30, 2002 June 30, 2001
------------- -------------
Net sales 100.0 % 100.0 %
Cost of sales 57.8 64.3
------------- -------------
Gross profit 42.2 35.7
------------- -------------
Operating expenses:
General and administrative 14.0 21.5
Advertising 18.9 25.1
Severance charges - 3.6
Depreciation and amortization 0.6 1.8
------------- -------------
Total operating expenses 33.5 52.0
------------- -------------
Income (loss) from operations 8.7 (16.3)
------------- -------------
Other income (expense):
Loss on disposal of property and equipment - (3.5)
Interest expense - (0.6)
Interest income - 0.1
Other, net - -
------------- -------------
Total other income (expense) - (4.0)
------------- -------------
Income (loss) before provision for income taxes 8.7 (20.3)
Provision for income taxes 2.6 -
------------- -------------
Net income (loss) 6.1 (20.3)
============= =============
9
Three Months Ended June 30, 2002 Compared With Three Months Ended June
30, 2001
Sales
-----
Sales for the first quarter of fiscal 2003 increased by approximately
$9,467,000, or 176.5%, to approximately $14,831,000 for the quarter
ended June 30, 2002, from approximately $5,364,000 for the quarter
ended June 30, 2001. The increase in sales is primarily due to the
positive effects of increased advertising and reorder sales. The
Company has committed certain amounts specifically designated towards
television advertising to stimulate sales and create brand awareness.
Historically, sales have a tendency to increase in the first and
second fiscal quarters due to the seasonality of certain pet
medications. The Company cannot accurately predict future sales,
however, based on current circumstances the Company does expect
increases to the second quarter sales of fiscal 2003.
Cost of sales
-------------
Cost of sales for the first quarter of fiscal 2003 increased by
approximately $5,117,000, or 148.3%, to approximately $8,568,000 for
the quarter ended June 30, 2002, from approximately $3,451,000 for the
quarter ended June 30, 2001. The increase to cost of sales for the
three months ended June 30, 2002 is directly related to the increase
in retail sales. However, as a percent of sales, the cost of sales
was 57.8% in the first quarter of fiscal 2003, as compared to 64.3 %
in the first quarter of fiscal 2002. This percentage reduction can be
attributed to the Company's continued efforts to purchase medications
in larger quantities, by bulk, to take advantage of any and all
purchasing discounts available.
Gross profit
------------
Gross profit increased by approximately $4,350,000, or 227.4%, to
approximately $6,263,000 for the quarter ended June 30, 2002 from
approximately $1,913,000 for the quarter ended June 30, 2001. Gross
profit as a percentage of sales for the quarter ended June 30, 2002
and 2001 was 42.2% and 35.7%, respectively.
General and administrative expenses
-----------------------------------
General and administrative expense increased by approximately
$931,000, or 80.8%, to approximately $2,083,000 for the quarter ended
June 30, 2002 from approximately $1,152,000 for the quarter ended June
30, 2001. The increase in general and administrative expense in the
first quarter of fiscal 2003 is primarily attributable to a $625,000
increase to payroll expenses, $265,000 increase to bank service and
credit card fees, $70,000 increase to professional fees, and a $21,000
increase in property expenses, which includes utilities and rental
expenses, offset with a $50,000 decrease to telephone expenses due to
a switch in local and long distance carriers. The increase to payroll
expenses can be attributed to the addition of new employees in the
sales, customer and pharmacy departments, which enabled the company to
sustain its continued growth.
Advertising expenses
--------------------
Advertising expenses increased by approximately $1,459,000, or
approximately 108.3%, to approximately $2,807,000 for the quarter
ended June 30, 2002 from approximately $1,348,000 for the quarter
ended June 30, 2001. The significant increase in advertising expense
for the three months ended June 30, 2002 was due to the Company's plan
to commit certain amounts specifically designated towards television
advertising to stimulate sales and create brand awareness. The
Company expects this trend in advertising to continue into the second
quarter of 2003.
Severance charges
-----------------
Severance charges for the three months ended June 30, 2001 of $195,000
relate to severance due to two former executive officers, the CFO and
COO, of the Company. On June 13, 2001, the Company entered into a
Release and Termination agreement with its former COO. The former
COO's termination date was effective as of May 18, 2001. The
agreement entitles the former COO to receive an amount equal to one
year's base salary, in the amount of $75,000. On May 1, 2001, the
former CFO of the Company, provided notice of termination of his
Executive Employment Agreement with the Company dated March 7, 2000,
as amended. In the notice, the former CFO also demanded payment of
certain benefits allegedly due under the Executive Employment
Agreement. The Company continued discussions in an effort to resolve
this matter, and in accordance with the CFO's Executive Employment
Agreement, the Company accrued a severance charge in the first quarter
of fiscal 2002, for the amount of $120,000.
10
On October 31, 2001, the Company entered into a Release and
Termination agreement with its former CFO. The former CFO's
termination date was effective as of May 31, 2001. The agreement
entitled the former CFO to receive an amount equal to one year's base
salary, in the amount of $120,000, which was paid in fiscal 2002.
Additionally, the former CFO agreed to provide consulting services to
the Company on financial matters until March 31, 2002, for which he
was separately compensated, and paid in fiscal 2002.
Depreciation and amortization expenses
--------------------------------------
Depreciation and amortization expenses decreased by approximately
$17,000, or 17.4%, to approximately $81,000 for the quarter ended June
30, 2002 from approximately $98,000 for the quarter ended June 30,
2001. The slight decrease to depreciation and amortization expense
for the three months ended June 30, 2002 can be attributed to the sale
of the corporate office building in the first quarter of fiscal 2002,
offset with depreciation expense related to increased property
additions since the first quarter of fiscal 2002.
Loss on disposal of land and building
-------------------------------------
In the first quarter of fiscal 2002, the Company recorded a loss on
disposal of land and building of $185,000. The loss was a result of
the sale of the corporate office building, which includes the
principal executive offices and warehouse, to an unrelated third
party. The Company received gross proceeds of $2,150,000, of which
approximately $1,561,000 was used to pay off the mortgage.
Interest expense
----------------
Interest expense decreased by approximately $26,000, or 82.6%, to
approximately $6,000 for the quarter ended June 30, 2002 from
approximately $32,000 for the quarter ended June 30, 2001. The
decrease to interest expense for the three months ended June 30, 2002
can be attributed to a reduction in interest expense relating to the
mortgage payoff of the Company's principal executive offices in the
first quarter of fiscal 2002.
Provision for income taxes
--------------------------
The Company had incurred significant net losses since its inception in
1996. These losses have resulted in net operating loss carryforwards
and deferred tax assets, which have been used by the Company to offset
tax liabilities, which may have been incurred in prior periods. The
Company recorded a valuation allowance against the deferred income tax
assets, since future utilization of these assets is subject to the
Company's ability to generate taxable income. For the three months
ended June 30, 2002, the Company established an income tax provision
to provide for taxable income as the utilization of net operating loss
carryforwards are limited.
Liquidity and Capital Resources
The Company's working capital at June 30, 2002 was $1,503,000, as
compared to the $1,347,000 deficiency at June 30, 2001, an increase of
approximately $2,850,000 from the deficiency at June 30, 2001. The
increase in working capital at June 30, 2002 was primarily
attributable to a significant increase in inventory offset with a
smaller increase in accounts payable due to cash flows generated from
increased sales. Net cash used in operating activities was $338,000
and $568,000 for the quarter ended June 30, 2002 and 2001,
respectively. Net cash used in investing activities was $312,000 for
the quarter ended June 30, 2002 as compared to net cash provided by
investing activities of $1,992,000 for the quarter ended June 30,
2001. This change can be attributed to the receipt of proceeds from
the sale of the corporate office building and land in the first
quarter of fiscal 2002. Net cash provided by financing activities
increased to $142,000 for the quarter ended June 30, 2002 as compared
to net cash used in financing activities of $1,584,000 for the quarter
ended June 30, 2001. This increase relates directly to the
satisfaction of the mortgage on the corporate office building.
On May 31, 2001, the Company sold their 50,000 square foot office
building, which houses the Company's principal executive offices and
warehouse, to an unrelated third party. The Company received gross
proceeds of $2,150,000, of which approximately $1,561,000 was used to
pay off the mortgage, and the Company recognized a loss on the sale of
approximately $185,000. The Company then entered into a five-year
term lease agreement for 20,000 of the 50,000 square foot Pompano
Beach office building. Then on February 22, 2002, the Company entered
into a lease addendum which added approximately 12,000 square feet,
effective June 1, 2002, to accommodate the Company's warehouse
expansion. According to the lease addendum, all additional costs,
approximately $150,000, associated with tenant improvements related to
the warehouse expansion, will be paid by the lessee. The payments
will be amortized over a period of 24 months at a 9% interest rate.
These additional tenant improvements costs will be included with the
scheduled monthly lease payments.
11
On March 12, 2002, the Company entered into a $205,000, three year
term loan agreement with SouthTrust Bank, with interest accruing at
the lending institution's base rate plus 1% (5.75% at March 31, 2002).
The loan proceeds were used to purchase a $250,000 computer server.
The aggregate loan maturities are $68,000 per year for the next three
years.
At quarter ended June 30, 2002, borrowings under the line of credit
were limited to $150,000. At June 30, 2002, $141,214 was outstanding
under the line of credit agreement. On March 12, 2002, the Company
renewed the $150,000 line of credit with SouthTrust Bank, effective
through May 13, 2003, with an interest rate at the lending
institution's base rate plus 1%. On July 22, 2002, the Company
executed an agreement which increased the line of credit to
$1,000,000, effective through June 22, 2003. The new line of credit
is secured by substantially all of our assets, interest is at the
bank's base lending rate plus 1% (5.75% at July 31, 2002), and contains
various financial and operating covenants.
The Company had approximately $250,000 planned for capital expenditure
commitments for the warehouse expansion and fulfillment automation,
during the first quarter fiscal 2003, which was funded through cash
from operations. On July 19, 2002 the new warehouse and fulfillment
automation project was completed. The Company believes this expansion
project will triple the current capacity. The Company had financed
certain equipment acquisitions with capital leases, as of June 30,
2002 the Company had no outstanding lease commitments.
Other than working capital, credit line, and cash from operations, the
Company presently has no other alternative source of working capital.
For the year ended March 31, 2001, the Company had incurred
significant operating losses and cash flow deficiencies. However, for
the year ended March 31, 2002 the Company had net income of $825,000,
and for the quarter ended June 30, 2002 the Company had net income of
$902,000, and the Company has sustained profitability for four
consecutive quarters. Additionally, the Company has committed certain
amounts specifically designated towards advertising to stimulate sales
growth. However, increased advertising may negatively impact our
short term profitability. The Company may seek to raise additional
capital in the future, through the sale of equity securities. No
assurances can be given that the Company will be successful in
obtaining additional capital, or that such capital will be available
in terms acceptable to the Company. At this time, the Company has no
commitments or plans to obtain additional capital. Further, there can
be no assurances that even if such additional capital is obtained that
the Company will sustain profitability or positive cash flow.
12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report.
99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350 (filed herewith to Exhibit 99.1 of the Registrant's
Report on Form 10-Q for the quarter ended June 30, 2002,
Commission File No. 000-28827).
99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350 (filed herewith to Exhibit 99.2 of the Registrant's
Report on Form 10-Q for the quarter ended June 30, 2002,
Commission File No. 000-28827).
99.3 Line of Credit Agreement with SouthTrust Bank, N.A. (filed
herewith to Exhibit 99.3 of the Registrant's Report on Form 10-Q
for the quarter ended June 30, 2002, Commission File No. 000-
28827).
(b) Reports on Form 8-K during the fiscal quarter ended June 30, 2002
None
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
PETMED EXPRESS, INC.
(The "Registrant")
Date: August 12, 2002
By:_____/s/ Menderes Akdag__________
Menderes Akdag
Chief Executive Officer
(principal executive officer)
By:___/s/ Bruce S. Rosenbloom_______
Bruce S. Rosenbloom
Chief Financial Officer
(principal financial and accounting officer)
14
______________________________________________________________________
______________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
PETMED EXPRESS, INC.
_______________________
FORM 10-QSB QUARTERLY REPORT
FOR THE QUARTER ENDED:
JUNE 30, 2002
_______________________
EXHIBITS
_______________________
______________________________________________________________________
______________________________________________________________________
EXHIBIT INDEX
-------------
Exhibit Number of Pages Incorporated
Number Description in Original By
Document + Reference
99.1 Certification of Principal Executive
Officer Pursuant to 18 U.S.C. Section
1350 1 **
99.2 Certification of Principal Financial
Officer Pursuant to 18 U.S.C. Section
1350 1 **
99.3 Line of Credit Agreement with
SouthTrust Bank, N.A. 11 **
** Filed herewith