XNAS:PETS PetMed Express Inc Annual Report 10-K Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the fiscal year ended March 31, 2012
   
OR
   
 o 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
(IRS Employer
incorporation or organization)
Identification No.)
   
1441 S.W. 29th Avenue, Pompano Beach, Florida 33069
(Address of principal executive offices) (Zip Code)
 
       Registrant’s telephone number, including area code: (954) 979-5995
 
     Securities registered under Section 12(b) of the Act:
 
    Title of each class  
Name of each exchange on which
registered
 
         
 
COMMON  STOCK,  $.001  PAR  VALUE
 
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
 
     
 
Securities registered under Section 12(g) of the Act:
 
     
 
NONE
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
 
Indicate by check mark 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 filing requirements for the past 90 days.  Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceeding12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
         
   Large accelerated filer o Accelerated filer x
   Non-accelerated filer o Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x
 
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of September 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, was $177.0 million based on the closing sales price of the registrant’s Common Stock on that date, as reported on the NASDAQ Global Select Market.
 
The number of shares of the registrant’s Common Stock outstanding as of May 28, 2012 was 20,334,941.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Information to be set forth in our Proxy Statement relating to our 2012 Annual Meeting of Stockholders to be held on July 27, 2012 is incorporated by reference in Items 10, 11, 12, 13, and 14 of Part III of this report.
 


 
 

 
 
PETMED EXPRESS, INC.
 
2012 Annual Report on Form 10-K
 
TABLE OF CONTENTS
 
         
Page
PART I
     
1
 
Item 1.
 
Business
 
1
 
Item 1A.
 
Risk Factors
 
6
 
Item 1B.
 
Unresolved Staff Comments
 
11
 
Item 2.
 
Properties
 
11
 
Item 3.
 
Legal Proceedings
 
11
 
Item 4.
 
Mine Safety Disclosures
 
11
           
PART II
     
12
 
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
12
 
Item 6.
 
Selected Financial Data
 
15
 
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
16
 
Item 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
 
23
 
Item 8.
 
Financial Statements and Supplementary Data
 
24
 
Item 9.
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
44
 
Item 9A.
 
Controls and Procedures
 
44
 
Item 9B.
 
Other Information
 
44
           
PART III
     
45
 
Item 10.
 
Directors, Executive Officers, and Corporate Governance
 
45
 
Item 11.
 
Executive Compensation
 
45
 
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
45
 
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
 
45
 
Item 14.
 
Principal Accountant Fees and Services
 
45
           
PART IV
     
46
 
Item 15.
 
Exhibits, Financial Statement Schedules
 
46
           
SIGNATURES
 
47
 
 
 

 
 
PART I
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
 
Certain information in this Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  You can identify these forward-looking statements by the words “believes, “intends,” “expects,” “may,” “will,” “should,” “plan,” “projects,” “contemplates,” “intends,” “budgets,” “predicts,” “estimates,” “anticipates,” or similar expressions.  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-K, PetMed Express,” “1-800-PetMeds,” “PetMeds,” “PetMed,” “PetMeds.com,” “PetMed Express.com,” “the Company,”  “we,” “our,” and “us” refer to PetMed Express, Inc. and our wholly-owned subsidiaries.
 
ITEM 1. BUSINESS
 
General
 
PetMed Express, Inc. and subsidiaries, d/b/a 1-800-PetMeds, is a leading nationwide pet pharmacy.  The Company markets prescription and non-prescription pet medications, and other health products for dogs and cats, direct to the consumer.  The Company offers consumers an attractive alternative for obtaining pet medications in terms of convenience, price, and speed of delivery.
 
The Company markets its products through national television, online, and direct mail/print advertising campaigns, which aim to increase the recognition of the “1-800-PetMeds” brand name, and “PetMeds” family of trademarks, increase traffic on its website at www.1800petmeds.com, acquire new customers, and maximize repeat purchases.  Our fiscal year end is March 31, our executive offices are located at 1441 S.W. 29th Avenue, Pompano Beach, Florida 33069, and our telephone number is (954) 979-5995.
 
Our Products
 
We offer a broad selection of products for dogs and cats.  Our current product line contains approximately 1200 SKUS.  These products include a majority of the well-known brands of medication, such as Frontline Plus®, K9 Advantix® II, Advantage® II, Heartgard Plus®, Sentinel®, Interceptor®, Program®, Revolution®, Deramaxx®, and Rimadyl®.  Generally, our prices are competitive with the prices for medications charged by veterinarians and retailers.  In March 2010, the Company started offering for sale additional pet supplies on our website, which are drop shipped to our customers by third parties.  These pet supplies include: food, beds, crates, stairs, strollers, and other popular pet supplies.
 
We research new products, and regularly select new products or the latest generation of existing products to become part of our product selection.  In addition, we also refine our current products to respond to changing consumer-purchasing habits.  Our website is designed to give us the flexibility to change featured products or promotions.  Our product line provides customers with a wide variety of selections across the most popular health categories for dogs and cats.  Our current products include:
 
Non-Prescription Medications (OTC) and supplies: Flea and tick control products, bone and joint care products, vitamins, treats, nutritional supplements, hygiene products, and supplies.
 
Prescription Medications (Rx): Heartworm preventatives, arthritis, thyroid, diabetes, pain medications, antibiotics, and other specialty medications, as well as generic substitutes.
 
 
1

 
 
Sales
 
The following table provides a breakdown of the percentage of our total sales by each category during the indicated periods:
 
   
Year Ended March 31,
 
   
2012
   
2011
   
2010
 
 
Non-prescription medications and supplies
    59 %     61 %     64 %
Prescription medications
    40 %     38 %     35 %
Shipping and handling charges and other
    1 %     1 %     1 %
Total
    100 %     100 %     100 %

We offer our products through three main sales channels: Internet through our website, telephone contact center through our toll-free number, and direct mail/print through 1-800-PetMeds catalogs, brochures, and postcards.  We have designed our catalogs and website 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 our customers with increased shopping flexibility and excellent service.
 
Internet
 
We seek to combine our product selection and pet health information with the shopping ease of the Internet to deliver a convenient and personalized shopping experience.  Our website offers health and nutritional product selections for dogs and cats, and relevant editorial and easily obtainable or retrievable resource information.  From our home page, customers can search our website for products and access resources on a variety of information on dogs and cats.  Customers can shop at our website by category, product line, individual product, or symptom.  We attracted approximately 19.1 million visitors to our website during fiscal 2012, approximately 13% of those visitors placed an order, and our website generated approximately 75% of our total sales for the same time period.
 
In February 2006, we began sponsorship of a website called “PetHealth101 which is located at www.PetHealth101.com.  In PetHealth101, pet owners have access to health information covering pets’ behavior and illnesses, and natural and pharmaceutical remedies specifically for a pet’s problems.  During fiscal 2012, the PetHealth101 content was incorporated into our main website.  The pet education content on our main website is periodically updated with the latest research for pet owners.
 
Telephone Contact Center
 
Our customer care representatives receive and process inbound and outbound customer calls, facilitate our live web chat, and process customer e-mails.  Our telephone system is equipped with certain features including pop-up screens and call blending capabilities that give us the ability to efficiently utilize our customer care representatives’ time, providing excellent customer care, service, and support.  Our customer care representatives receive a base salary and are rewarded with commissions for sales, and bonuses and other awards for achieving certain quality goals.
 
Direct Mail/Print
 
The 1-800-PetMeds catalog is a full-color catalog that features our most popular products.  The catalog is produced by a combination of in-house writers, production artists, and independent contractors.  We mail catalogs, brochures, and postcards in response to requests generated from our advertising and as part of direct mail campaigns to our customers.
 
Our Customers
 
Approximately 2.7 million customers have purchased from us within the last two years.  We attracted approximately 722,000 and 645,000 new customers in fiscal 2012 and 2011, respectively.  Our customers are located throughout the United States, with approximately 50% of customers residing in California, Florida, New York, Texas, Pennsylvania, Virginia, North Carolina, and New Jersey.  Our primary focus has been on retail customers and the average purchase was approximately $76 for fiscal 2012 compared to $79 for fiscal 2011.
 
 
2

 
 
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 have an integrated marketing campaign that includes television advertising, online marketing, direct mail/print and e-mail.
 
Television Advertising
 
Our television advertising is designed to build brand equity, create brand awareness, and generate initial purchases of products via the telephone and the Internet.  We have used :30 and :15 second television commercials to attract new customer orders.  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 to target our key demographic group – women, ages 30 to 65.  We believe that television advertising is particularly effective and instrumental in building brand awareness.
 
Online Marketing
 
We supplement our traditional advertising with online advertising and marketing efforts.  We make our brand available to Internet consumers by purchasing targeted keywords and achieving prominent placement on the top search engines and search engine networks, including Google, Bing™, and Yahoo®.  We utilize Internet display and video advertisements, social media, and comparison shopping, and we are also members of the LinkShare Network, which is an affiliate program with merchant clients and affiliate websites.
 
Direct Mail/Print and E-mail
 
We use direct mail/print and e-mail to acquire new customers and to remind our existing customers to reorder.
 
Operations
 
Order Processing
 
Our website allows customers to easily browse and purchase all of our products online.  Our website is designed to be fast, secure, and easy to use with order and shipping confirmations, and with online order tracking capabilities.  We provide our customers with toll-free telephone access to our customer care representatives.  Our call center generally operates from 8:00 AM to 11:00 PM, Monday through Thursday, 8:00 AM to 9:00 PM on Friday, 9:00 AM to 6:00 PM on Saturday, and 10:00 AM to 5:00 PM on Sunday, Eastern Time.  The process of customers purchasing products from 1-800-PetMeds consists of a few simple steps.  A customer first places a call to our toll-free telephone number or visits our website.  The following information is needed to process prescription orders: pet information, prescription information, and the veterinarian’s name and phone number.  This information is entered into our computer system.  Then our pharmacists and pharmacy technicians verify all prescriptions.  The order process system checks for the verification for prescription medication orders and a valid payment method for all orders.  An invoice is generated and printed in our fulfillment center, where items are picked, and then shipped via United States Postal Service, Federal Express, or UPS.  Our customers enjoy the convenience of rapid home delivery, with approximately 80% of all orders being shipped within 24 hours of ordering.
 
Customer Care and Support
 
We believe that a high level of customer care and support is critical in retaining and expanding our customer base.  Customer care representatives participate in ongoing training programs under the supervision of our training managers.  These training sessions include a variety of topics such as product knowledge, computer usage, customer service tips, and the relationship between our Company and veterinarians.  Our customer care representatives respond to customers’ e-mails and calls that are related to products, order status, prices, and shipping.  Our customer care representatives also respond to customers through our live web chat.  We believe our customer care representatives are a valuable source of feedback regarding customer satisfaction.  Our customer returns and credits averaged approximately 1.5% of total sales for fiscal 2012.
 
 
3

 
 
Warehousing and Shipping
 
We inventory our products and fill most customer orders from our corporate headquarters in Pompano Beach, Florida.  We have an in-house fulfillment and distribution operation, which is used to manage the entire supply chain, beginning with the placement of the order, continuing through order processing, and then fulfilling and shipping of the product to the customer.  We offer a variety of shipping options, including next day delivery.  We ship to anywhere in the United States served by the United States Postal Service, Federal Express, or UPS.  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 medications, our goal is to ship the product immediately after the prescription has been authorized by the customer’s veterinarian.
 
Purchasing
 
We purchase our products from a variety of sources, including certain manufacturers, domestic distributors, and wholesalers.  There were four suppliers from whom we purchased approximately 50% of all products in fiscal 2012.  We purchase the majority of our health and nutritional supplements directly from manufacturers.  We believe having strong relationships with product manufacturers will ensure the availability of an adequate volume of products ordered by our customers, and will 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, such as our Company.  (See Risk Factors.)  Part of our growth strategy includes developing direct relationships with the leading pharmaceutical manufacturers of the more popular prescription and non-prescription medications.  In March 2010 Bayer started making their products available directly to pet specialty retailers and internet sites, including our Company.
 
Technology
 
We utilize integrated technologies in our call centers, e-commerce, order entry, and inventory control/fulfillment operations.  Our systems are custom configured by the Company to optimize our computer telephone integration and mail-order processing.  The systems are designed to maintain a large database of specialized information and process a large volume of orders efficiently and effectively.  Our systems provide our customer care representatives, and our customers on our website, with real time product availability information and updated customer information to enhance our customer care.  We also have an integrated direct connection for processing credit cards to ensure that a valid credit card number and authorization have been received at the same time our customer care representatives are on the phone with the customer or when a customer submits an order on our website.  Our information systems provide our customer care representatives with records of all prior contact with a customer, including the customer’s address, phone number, e-mail address, prescription information, order history, payment history, and notes.
 
Competition
 
The pet medications market is competitive and highly fragmented.  Our competitors consist of veterinarians, online and traditional retailers.  We believe that the following are the principal competitive factors in our market:
 
 
Product selection and availability, including the availability of prescription and non-prescription medications;
 
Brand recognition;
 
Reliability and speed of delivery;
 
Personalized service and convenience;
 
Price; and
 
Quality of website content.
 
We compete with veterinarians for the sale of prescription and non-prescription pet medications and other health products.  Many pet owners may prefer the convenience of purchasing their pet medications or other health products at the time of a veterinarian visit, or may be hesitant to offend 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 service, convenience, and savings offered by our Company.
 
 
4

 
 
According to the American Pet Products Manufacturers Association, pet spending in the United States increased 5.3% to $51.0 billion in 2011.  Pet supplies and medications represented $11.8 billion, or 23% of the total spending on pets in the United States.  The pet medication market that we participate in is estimated to be approximately $4.0 billion, with veterinarians having the majority of the market share.  The dog and cat population is approximately 165 million, with approximately 62% of all households owning a pet.
 
We believe that the following are the main competitive strengths that differentiate 1-800-PetMeds from the competition:
 
 
Channel leader, in an estimated $4.0 billion industry;
 
“1-800-PetMeds” brand name;
 
Licensed pharmacy to conduct business in 50 states, and awarded Vet-VIPPSCM (Veterinary-Verified Internet Pharmacy Practice Site) accreditation by the National Association of Boards of Pharmacy®;
 
Exceptional customer care and support
 
Intellectual Property
 
We conduct our business under the trade name “1-800-PetMeds” and use a family of names all containing the term “PetMeds” or “PetMed” in some form.   We believe this trade name, which is also our toll-free telephone number, and the “PetMeds” family of trademarks, have added significant value and are an important factor in the marketing of our products. We have also obtained the right to use and control the Internet addresses www.1800petmeds.com, www.1888petmeds.com, www.petmedexpress.com, www.petmed.com, and www.petmeds.com.   We do not expect to lose the ability to use the Internet addresses; however, there can be no assurance in this regard and the loss of these addresses may have a material adverse effect on our financial position and results of operations.  We are the exclusive owners of United States Trademark Registrations for “PetMed Express and Design®,” “1888PetMeds and Design®,” “1-800-PetMeds and Design®,” 1-800-PetMeds®,” and “PetMeds®.”
 
Government Regulation
 
Dispensing prescription medications 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 are licensed as a community pharmacy by the Florida Board of Pharmacy.  Our current license is valid until February 28, 2013, and prior to that date a renewal application will be submitted to the Board of Pharmacy.  Our pharmacy practice is also licensed and/or regulated by 49 other state pharmacy boards and, with respect to our products, by other regulatory authorities including, but not necessarily limited to, the United States Food and Drug Administration (“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.  To the extent that we are unable to maintain our license as a community pharmacy with the Florida Board of Pharmacy, or if we do not maintain the licenses granted by other state pharmacy boards, or if we become subject to actions by the FDA, or other enforcement regulators, our distribution of prescription medications to pet owners could cease, which could have a material adverse effect on our financial condition and results of operations.
 
Employees
 
We currently have 207 full time employees, including: 125 in customer care and marketing; 33 in fulfillment and purchasing; 35 in our pharmacy; 4 in information technology; 3 in administrative positions; and 7 in management.  None of our employees are represented by a labor union, or governed by any collective bargaining agreements.  We consider relations with our employees to be satisfactory.
 
Available Information
 
We file annual, quarterly, and current reports, proxy statements, and other information with the Securities and Exchange Commission (“SEC).  Our SEC filings, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to the Exchange Act are available free of charge over the Internet on our website at www.1800petmeds.com or at the SEC’s web site at www.sec.gov.  Our SEC filings will be available through our website as soon as reasonably practicable after we have electronically filed or furnished them to the SEC. Information contained on our website is not incorporated by reference into this annual report on Form 10-K.
 
 
5

 
 
ITEM 1A. RISK FACTORS
 
You should carefully consider the risks and uncertainties described below, and all the other information included in this Annual Report on Form 10-K 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 loss of your investment.
 
We may inadvertently fail to comply with various state regulations covering the dispensing of prescription pet medications which may subject us 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 state regulations.  Since our pharmacy is located in the State of Florida, the Company is governed by the laws and regulations of the State of Florida.  Each prescription pet medication sale we make is likely also 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 be dispensed with the authorization from a prescribing veterinarian.  To the extent that we are unable to maintain our license as a community pharmacy with the Florida Board of 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 other enforcement regulators, our distribution of prescription medications to pet owners could cease, which could have a material adverse effect on our operations.
 
The Company is a party to routine litigation and administrative complaints incidental to its business.  Management does not believe that the resolution of any or all of such routine litigation and administrative complaints is likely to have a material adverse effect on the Company’s financial condition or results of operations.  While we make every effort to fully comply with all applicable state rules, laws, and regulations, from time to time we have been the subject of administrative complaints regarding the authorization of prescriptions prior to shipment.  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 fines, or that one or more of our pharmacy licenses will not be suspended or revoked.  If we were unable to maintain our license as a community pharmacy in the State of Florida, or if we are not granted licensure in a state that begins to require licensure, or if one or more of the licenses granted by other state boards should be suspended or revoked, our ability to continue to sell prescription medications and to continue our business as it is presently conducted could be in jeopardy.
 
We currently purchase a portion of our prescription and non-prescription medications from third party distributors and we are not an authorized distributor of these products.  We do not have any guaranteed supply of medications at any pre-established prices.
 
The majority of our sales were attributable to sales of prescription and non-prescription medications.  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 domestic 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 will continue to rely upon secondary sources.
 
We cannot guarantee that if we continue to purchase prescription and non-prescription pet medications from secondary sources 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 are 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 financial condition and results of operations.
 
 
6

 
 
Our failure to properly manage our inventory may result in excessive inventory carrying costs, or inadequate supply of products, which could materially adversely affect our financial condition and results of operations.
 
Our current product line contains approximately 1200 SKUs.  A significant portion of our sales is attributable to products representing approximately 90 SKUs, including the most popular flea and tick, and heartworm preventative brands.  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, or attempts/efforts on their part to discourage pet owners to purchase from internet mail-order pharmacies could cause our sales to decrease and could materially adversely affect our financial condition and results of operations.
 
Since we began our operations 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 state law.  We have also been informed by customers and consumers that veterinarians have tried to discourage pet owners from purchasing from internet mail-order pharmacies.  Sales of prescription medications represented approximately 40% of our sales for the fiscal year.  Although veterinarians in some states are required by law to provide a pet owner with a prescription if medically appropriate, if the number of veterinarians who refuse to authorize prescriptions should increase, or if veterinarians are successful in discouraging pet owners from purchasing from internet mail-order pharmacies, our sales could decrease and our financial condition and results of operations may be materially adversely affected.
 
Significant portions of our sales are made to residents of eight 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 all 50 states, approximately 50% of our sales for the fiscal year ended March 31, 2012 were made to customers located in the states of California, Florida, New York, Texas, Pennsylvania, Virginia, North Carolina, and New Jersey.   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 granted or renewed, our ability to sell prescription medications to residents of those states would cease and our financial condition and results of operations in future periods would be materially adversely affected.
 
We face significant competition from veterinarians and online and traditional retailers and may not be able to compete profitably with them.
 
We compete directly and indirectly with veterinarians for the sale of pet medications and other health products.  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.  We also compete directly and indirectly with both online and traditional retailers.  Both online and traditional retailers may hold a competitive advantage over us because of longer operating histories, established brand names, greater resources, and/or an established customer base.  Online retailers may have a competitive advantage over us because of established affiliate relationships to drive traffic to their website.  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 catalog or 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 and adversely affect the results of operations.
 
We also face a significant challenge from our competitors forming alliances with each other, such as those between online and traditional 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.
 
 
7

 
 
The content of our website could expose us to various kinds of liability, which, if prosecuted successfully, could negatively impact our business.
 
Because we post product and pet health information and other content on our website, we face potential liability for negligence, copyright infringement, patent infringement, trademark infringement, defamation, and/or 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.
 
We may not be able to protect our intellectual property rights, and/or we may be found to infringe on the proprietary rights of others.
 
We rely on a combination of trademarks, trade secrets, copyright laws, and contractual restrictions to protect our intellectual property rights.  These afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy our non-prescription 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 website and our content, and our trademarks.  Litigation or proceedings before the United States Patent and Trademark Office or other bodies may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and domain names, or to determine the validity and scope of the proprietary rights of others.  Any litigation or adverse 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 market 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 addresses or to prevent others from using Internet addresses that are confusingly similar, our business may be adversely impacted.
 
Our Internet addresses, www.1800petmeds.com, www.1888petmeds.com, www.petmedexpress.com, www.petmed.com, and www.petmeds.com are critical to our brand recognition and our overall success.  If we are unable to protect these Internet addresses, our competitors could capitalize on our brand recognition.  There may be similar Internet addresses used by competitors.  Governmental agencies and their designees generally regulate the acquisition and maintenance of Internet addresses.  The regulation of Internet addresses 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 Internet addresses and laws protecting trademarks and similar proprietary rights is unclear.  Therefore, we may not be able to protect our own Internet addresses, or prevent third parties from acquiring Internet addresses that are confusingly similar to, infringe upon, or otherwise decrease the value of our Internet addresses.
 
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 two buildings in one location in South Florida, and most 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, business interruptions resulting from damage to or destruction of our headquarters and distribution center, or power and equipment failures relating to our call center or websites, or interruptions or disruptions to major transportation infrastructure, or other events that do not occur on our premises.  The occurrence of one or more of these events could adversely impact our ability to generate revenues in future periods.
 
 
8

 
 
Our operating results are difficult to predict and may fluctuate, and a portion of our sales are seasonal.
 
Factors that may cause our operating results to fluctuate include:
 
 
Our ability to obtain new customers at a reasonable cost, retain existing customers, or encourage reorders;
 
Our ability to increase the number of visitors to our website, or our ability to convert visitors to our website into customers;
 
The mix of medications and other pet products sold by us;
 
Our ability to manage inventory levels or obtain an adequate supply of products;
 
Our ability to adequately maintain, upgrade, and develop our website, the systems that we use to process customers’ orders and payments, or our computer network;
 
Increased competition within our market niche;
 
Price competition;
 
New products introduced to the market, including generics;
 
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;
 
Disruption of our toll-free telephone service, technical difficulties, or systems and Internet outages or slowdowns; and
 
Unfavorable general economic trends.
 
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.  The majority of our product sales are affected by the seasons, due to the seasonality of mainly heartworm, and flea and tick medications.  For the quarters ended June 30, 2011, September 30, 2011, December 31, 2011, and March 31, 2012, Company sales were 31%, 24%, 21%, and 24%, respectively.  In addition to the seasonality of our sales, our annual and quarterly operating results have fluctuated in the past and may fluctuate significantly in the future due to a variety of factors, many of which are out of our control.  Any change in one or more of these factors could materially adversely affect our financial condition and results of operations in future periods.
 
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 a loss on your investment.
 
The market price of our common stock may fluctuate significantly in response to a number of factors, many of which are out of 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; and general political, economic, and market conditions.
 
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.
 
We may issue additional shares of preferred stock that 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 5.0 million shares of preferred stock without stockholder approval.  Currently there are 2,500 shares of our Convertible Preferred Stock issued and outstanding.  This leaves a little less than 5.0 million 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 stockholders and which could also be utilized, under some circumstances, as a method of discouraging, delaying, or preventing a 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.
 
 
9

 
 
The United States Environmental Protection Agency (“EPA”) has announced its intention to increase restrictions on flea and tick products and to caution consumers to use these products with extra care.  The Company’s sales and profits in future periods could be adversely impacted if sales for these products decline.
 
The EPA is taking a series of actions to increase the safety of spot-on pesticide products for flea and tick control for cats and dogs.  In 2008 the EPA received 44,000 complaints about certain “spot-on” pest prevention products, including some flea and tick control products that the Company currently sells.  The complaints reported adverse reactions ranging from mild effects such as skin irritations to more serious effects such as seizures and, in some cases, death of the pet.  Since that time, the EPA received additional information from the pet spot-on pesticide registrants and others and began an intensive evaluation of these products. Among immediate actions that the EPA is going to pursue are: requiring manufacturers of spot-on pesticide products to improve labeling, making instructions clearer to prevent product misuse; requiring more precise label instructions to ensure proper dosage per pet weight; requiring clear markings to differentiate between dog and cat products, and disallowing similar brand names for dog and cat products. There can be no assurances that this action by the EPA will not adversely affect our future sales and profits.
 
A failure of our information systems or any security breach or unauthorized disclosure of confidential information could have a material adverse effect on our business.
 
Our business is dependent upon the efficient operation of our information systems. In particular, we rely on our information systems to effectively manage our business model strategy, with tools to track and manage sales, inventory, marketing, customer service efforts, the preparation of our consolidated financial and operating data, credit card information, and customer information.  The failure of our information systems to perform as designed or the failure to maintain and enhance or protect the integrity of these systems could disrupt our business operations, impact sales and the results of operations, expose us to customer or third-party claims, or result in adverse publicity.  Additionally, we collect, process, and retain sensitive and confidential customer information in the normal course of our business.  Despite the security measures we have in place and any additional measures we may implement in the future, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, human errors, acts of vandalism, or other events.  Any security breach or event resulting in the misappropriation, loss, or other unauthorized disclosure of confidential information, whether by us directly or our third-party service providers, could damage our reputation, expose us to the risks of litigation and liability, disrupt our business, or otherwise affect our results of operations.
 
 
10

 
 
ITEM 1B.  UNRESOLVED STAFF COMMENTS
 
None
 
ITEM 2.  PROPERTIES
 
Our facilities, including our principal executive offices, are located at 1441 S.W. 29th Avenue and 2900 Gateway Drive, Pompano Beach, Florida 33069.  The Company leases its 65,300 square foot executive offices, warehouse facility and customer service and pharmacy contact centers under a non-cancelable operating lease, through May 31, 2015.  The Company is responsible for certain maintenance costs, taxes, and insurance under this lease.  The future minimum annual lease payments are as follows: $767,000 for fiscal 2013, $784,000 for fiscal 2014, $794,000 for fiscal 2015, and $133,000 for fiscal 2016, a lease payment total of $2.5 million.  Rent expense was $745,000, $724,000, and $703,000 for the years ended March 31, 2012, 2011 and 2010, respectively.  We believe that our facilities are sufficient for our current needs and are in good condition in all material respects.
 
ITEM 3.  LEGAL PROCEEDINGS
 
In October 2009, the Company was notified that it was named as a defendant in a multi-defendant lawsuit, filed in the United States District Court for the Eastern District of Texas, Marshall Division, seeking declaratory, injunctive, and monetary relief styled Charles E. Hill & Associates, Inc. v. ABT Electronics, Inc., et al, Cause No. 2:09-CV-313.  The lawsuit alleges that the Company is infringing on patents related to electronic catalog systems.  From the outset, the vendor that provides the Company with the Internet software had been defending and indemnifying the Company.  However, effective February 15, 2011, the company that acquired this vendor declined to provide any further indemnification of the Company.  On October 5, 2011, the parties engaged in court-ordered mediation, which was unsuccessful.  Without admitting any liability or wrongdoing, and with no finding or admission as to the merit or lack of merit of any claim or defense asserted in connection with the litigation, in May 2012, the Company entered into a licensing agreement, for a confidential amount, and a Stipulation of Dismissal was filed with the Court, dismissing the lawsuit against the Company.
 
The Company has settled complaints that had been filed with various states’ pharmacy boards in the past.  There can be no assurances made that other states will not attempt to take similar actions against the Company in the future.  The Company initiates litigation to protect its trade or service marks.  There can be no assurance that the Company will be successful in protecting its trade or service marks.  Legal costs related to the above matters are expensed as incurred.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.
 
 
11

 
 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
      Our common stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “PETS.”  The prices set forth below reflect the range of high and low closing sale prices per share in each of the quarters of fiscal 2012 and 2011 as reported by the NASDAQ.
 
 
Fiscal 2012:
 
High
   
Low
 
 
First Quarter
  $ 15.89     $ 11.53  
 
Second Quarter
  $ 12.28     $ 8.91  
 
Third Quarter
  $ 10.55     $ 8.57  
 
Fourth Quarter
  $ 12.72     $ 10.17  
                   
 
Fiscal 2011:
 
High
   
Low
 
 
First Quarter
  $ 24.50     $ 17.34  
 
Second Quarter
  $ 18.45     $ 15.45  
 
Third Quarter
  $ 18.80     $ 15.21  
 
Fourth Quarter
  $ 17.89     $ 14.39  
 
There were 88 holders of record of our common stock at May 28, 2012, and  approximately 12,000 of our holders are “street name” or beneficial holders, whose shares are held by banks, brokers, or other financial institutions.
 
Dividend Policy
 
On August 3, 2009, the Company’s Board of Directors declared its first quarterly dividend of $0.10 per share on its common stock.  On August 2, 2010, the Company’s Board of Directors increased the quarterly dividend to $0.125 per share, and then on January 27, 2012, the Company’s Board of Directors increased the quarterly dividend to $0.15 per share.  The Company intends to continue to pay regular quarterly dividends; however the declaration and payment of future dividends is discretionary and will be subject to a determination by the Board of Directors each quarter following its review of the Company’s financial performance.
 
During fiscal 2012, our Board of Directors declared the following dividends:
 
     
Per Share
     
Total Amount
   
 
Declaration Date
 
Dividend
 
Record Date
 
(In thousands)
 
Payment Date
 
 
May 6, 2011
  $ 0.125  
May 16, 2011
  $ 2,782  
May 27, 2011
 
July 29, 2011
  $ 0.125  
August 12, 2011
  $ 2,626  
August 26, 2011
 
October 28, 2011
  $ 0.125  
November 11, 2011
  $ 2,542  
November 25, 2011
 
January 27, 2012
  $ 0.150  
February 10, 2012
  $ 3,051  
February 24, 2012
 
On May 4, 2012, the Company’s Board of Directors declared a quarterly dividend of $0.15 per share on its common stock.  The $3.1 million dividend was paid on May 25, 2012, to shareholders of record at the close of business on May 14, 2012.
 
Share Repurchase Plan
 
On November 8, 2006, the Company’s Board of Directors approved a share repurchase plan of up to $20.0 million.  On October 31, 2008, November 1, 2010, and August 1, 2011, the Company’s Board of Directors approved a second, third, and fourth share repurchase plan, respectively, each for an additional $20.0 million.  The repurchase plan is intended to be implemented through purchases made from time to time in either the open market or through private transactions at the Company’s discretion, subject to market conditions and other factors, in accordance with Securities and Exchange Commission requirements.  There can be no assurances as to the precise number of shares that will be repurchased under the share repurchase plan, and the Company may discontinue the share repurchase plan at any time subject to compliance with applicable regulatory requirements.  Shares purchased pursuant to the share repurchase plan will either be cancelled or held in the Company’s treasury.
 
 
12

 
 
During fiscal 2012 the Company repurchased approximately 2.1 million shares of the Company’s outstanding common stock for approximately $23.7 million, averaging approximately $11.36 per share.  As of March 31, 2012, the Company had approximately $14.0 million remaining under the Company’s share repurchase plan.  During fiscal 2011 the Company repurchased approximately 791,000 shares of the Company’s outstanding common stock for approximately $12.2 million, averaging approximately $15.47 per share.  All shares repurchased in fiscal 2012 and 2011 were subsequently retired.  Since the inception of the share repurchase plan, approximately 5.2 million shares have been repurchased under the plan for approximately $66.0 million, averaging approximately $12.75 per share, with approximately $14.0 million remaining available for repurchase, as of May 28, 2012.
 
Performance Graph
 
Set forth below is a graph comparing the five year cumulative performance of our Common Stock with the Standard & Poor’s Composite-500 Stock Index (the “S&P 500”), the Nasdaq Composite, and the Russell 2000, from March 31, 2007 to March 31, 2012.  The graph assumes that $100 was invested on March 31, 2007 in each of our Common Stock, the S&P 500, the Nasdaq Composite, and the Russell 2000 and that all dividends were reinvested.  The performance graph and related information below shall not be deemed “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
 
(LINE GRAPH)
 
Performance graph data:
 
      Fiscal Year Ended March 31,  
   
2007
   
2008
   
2009
   
2010
   
2011
   
2012
 
Nasdaq Composite
    100.00       94.11       63.12       99.02       114.84       127.66  
S&P 500
    100.00       93.09       56.15       82.30       93.31       99.13  
Russell 2000
    100.00       85.92       52.80       84.75       105.35       103.70  
PetMed Express, Inc.
    100.00       93.59       139.07       187.09       133.84       104.47  
 
 
13

 
 
Securities Authorized for Issuance under Equity Compensation Plans
 
The following table sets forth securities authorized for issuance under equity compensation plans, including individual compensation arrangements, by us under our 2006 Employee Equity Compensation Restricted Stock Plan and 2006 Outside Director Equity Compensation Restricted Stock Plan as of March 31, 2012:
 
EQUITY COMPENSATION PLAN INFORMATION  
(In thousands, except for per share amounts)  
   
Number of securities
   
 
   
Number of securities
 
   
to be issued upon
   
Weighted average
   
remaining available
 
   
exercise of outstanding
   
exercise price of
   
for future issuance
 
   
options, warrants
   
outstanding options,
   
under equity
 
Plan category
 
and rights
   
warrants and rights
   
compensation plans
 
                   
2006 Employee Restricted Stock Plan
    542       -       458  
                         
2006 Director Restricted Stock Plan
    152       -       48  
                         
Total
    694               506  
 
 
14

 
 
ITEM 6.  SELECTED FINANCIAL DATA
 
The following selected financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and notes thereto, and other financial information included elsewhere in this Annual Report on Form 10-K.  The Consolidated Statements of Income data set forth below for the fiscal years ended March 31, 2012, 2011, and 2010 and the Consolidated Balance Sheet data as of March 31, 2012 and 2011 have been derived from our audited Consolidated Financial Statements which are included elsewhere in this Annual Report on Form 10-K.  The Consolidated Statements of Income data set forth below for the fiscal years ended March 31, 2009 and 2008 and the Consolidated Balance Sheet data as of March 31, 2010, 2009 and 2008 have been derived from our audited Consolidated Financial Statements which are not included in this Annual Report on Form 10-K.
 
CONSOLIDATED STATEMENTS OF INCOME DATA
(In thousands, except for per share amounts)
      Fiscal Year Ended March 31,  
   
2012
   
2011
   
2010
   
2009
   
2008
 
                               
Sales
  $ 238,250     $ 231,642     $ 238,266     $ 219,412     $ 188,336  
Cost of sales
    158,085       147,686       146,405       134,085       114,122  
Gross profit
    80,165       83,956       91,861       85,328       74,214  
Operating expenses
    54,143       50,932       51,319       51,127       46,218  
Net income
    16,659       20,871       26,002       22,976       20,022  
Net income per common share:
                                       
Basic
    0.81       0.93       1.15       0.99       0.83  
Diluted
    0.80       0.92       1.14       0.98       0.82  
Weighted average number of common shares outstanding:
                                       
Basic
    20,613       22,514       22,617       23,306       24,088  
Diluted
    20,708       22,643       22,746       23,482       24,299  
Cash dividends declared per common share
    0.525       0.475       0.300       -       -  
 
CONSOLIDATED BALANCE SHEET DATA DATA
(In thousands)
      March 31,  
   
2012
   
2011
   
2010
   
2009
   
2008
 
                               
Working capital
  $ 78,216     $ 80,643     $ 79,412     $ 54,630     $ 38,804  
Total assets
    91,064       106,287       104,170       81,963       73,455  
Total liabilities
    9,883       9,282       7,313       6,995       6,421  
Shareholders’ equity
    81,181       97,005       96,857       74,968       67,034  
 
NON FINANCIAL DATA (UNAUDITED)
(In thousands)
      March 31,  
   
2012
   
2011
   
2010
   
2009
   
2008
 
                               
New customers acquired
    722       645       815       802     710  
Total accumulated customers (1)
    6,830       6,108       5,463       4,648       3,846  
 
(1) includes both active and inactive customers
 
 
15

 
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Executive Summary
 
PetMed Express was incorporated in the state of Florida in January 1996.  The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “PETS.”  The Company began selling pet medications and other pet health products in September 1996.  In March 2010 the Company started offering for sale additional pet supplies on its website, and these items are drop shipped to customers by third party vendors. Presently, the Company’s product line includes approximately 1,200 of the most popular pet medications, health products, and supplies for dogs and cats.
 
The Company markets its products through national television, online, and direct mail/print advertising campaigns which aim to increase the recognition of the “1-800-PetMeds” brand name, and “PetMeds” family of trademarks, increase traffic on its website at www.1800petmeds.com, acquire new customers, and maximize repeat purchases.  Approximately 75% of all sales were generated via the Internet in fiscal 2012, compared to 71% in fiscal 2011.  The Company’s sales consist of products sold mainly to retail consumers.  The Company’s sales returns average was approximately 1.5% of sales for the fiscal year ended March 31, 2012 and approximately 1.4% for the fiscal year ended March 31, 2011.  The twelve-month average purchase was approximately $76 and $79 per order for the fiscal years ended March 31, 2012 and 2011, respectively.
 
Critical Accounting Policies
 
Our discussion and analysis of our financial condition and the results of our operations are based upon our Consolidated Financial Statements and the data used to prepare them.  The Company’s 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 judgments and estimates including those related to product returns, bad debts, inventories, long term investments, and income taxes.  We base our estimates and judgments 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
 
The Company generates revenue by selling pet medication products and pet supplies primarily to retail consumers.  The Company’s policy is to recognize revenue from product sales upon shipment, when the rights of ownership and risk of loss have passed to the customer.  Outbound shipping and handling fees are included in sales and are billed upon shipment.  Shipping expenses are included in cost of sales.  The majority of the Company’s sales are paid by credit cards and the Company usually receives the cash settlement in two to three banking days.  Credit card sales minimize accounts receivable balances relative to sales.  The Company maintains an allowance for doubtful accounts for losses that the Company estimates will arise from customers’ inability to make required payments, arising from either credit card charge-backs or insufficient funds checks.  The Company determines its estimates of the uncollectibility of accounts receivable by analyzing historical bad debts and current economic trends.  At March 31, 2012 and 2011 the allowance for doubtful accounts was approximately $5,000 and $6,000, respectively.
 
Valuation of inventory
 
Inventories consist of prescription and non-prescription pet medications and pet supplies that are available for sale and are priced at the lower of cost or market value using a weighted average cost method.  The Company writes down its inventory for estimated obsolescence.  The inventory reserve was approximately $66,000 and $63,000 as of March 31, 2012 and 2011, respectively.
 
Advertising
 
The Company’s advertising expense consists primarily of television advertising, Internet marketing, and direct mail/print advertising.  Television advertising costs are expensed as the advertisements are televised.  Internet costs are expensed in the month incurred and direct mail/print advertising costs are expensed when the related catalogs, brochures, and postcards are produced, distributed, or superseded.
 
 
16

 
 
Accounting for income taxes
 
The Company accounts for income taxes under the provisions of ASC Topic 740, (“Accounting for Income Taxes”), which generally requires the recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the 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 Consolidated Financial Statements and the related notes thereto included elsewhere herein.  The following table sets forth, as a percentage of sales, certain operating data appearing in the Company’s Consolidated Statements of Income:
 
   
Fiscal Year Ended March 31,
 
   
 
2012
   
2011
   
2010
 
                   
Sales
    100.0 %     100.0 %     100.0 %
Cost of sales
    66.3       63.8       61.4  
                         
Gross profit
    33.7       36.2       38.6  
                         
Operating expenses:
                       
General and administrative
    9.4       9.6       9.4  
Advertising
    12.8       11.8       11.6  
Depreciation
    0.6       0.6       0.6  
Total operating expenses
    22.8       22.0       21.6  
                         
Income from operations
    10.9       14.2       17.0  
                         
Total other income
    0.2       0.2       0.1  
                         
Income before provision for income taxes
    11.1       14.4       17.1  
                         
Provision for income taxes
    4.1       5.4       6.2  
                         
Net income
    7.0 %     9.0 %     10.9 %

Fiscal 2012 Compared to Fiscal 2011
 
Sales
 
Sales increased by approximately $6.7 million, or 2.9%, to approximately $238.3 million for the fiscal year ended March 31, 2012, from approximately $231.6 million for the fiscal year ended March 31, 2011.  The increase in sales for the fiscal year ended March 31, 2012 was primarily due to increased new order and reorder sales.  The increase in new order sales may be attributed to increased advertising expenses, with flat customer acquisition costs.  The Company acquired approximately 722,000 new customers for the year ended March 31, 2012, compared to approximately 645,000 new customers for the same period the prior year.
 
 
17

 
 
The following chart illustrates sales by various sales classifications:
 
      Year Ended March 31,              
Sales (In thousands)
 
2012
   
%
   
2011
   
%
   
$ Variance
   
% Variance
 
 
Reorder Sales
  $ 186,991       78.5 %   $ 184,341       79.6 %   $ 2,650       1.4 %
New Order Sales
  $ 51,259       21.5 %   $ 47,301       20.4 %   $ 3,958       8.4 %
Total Net Sales
  $ 238,250       100.0 %   $ 231,642       100.0 %   $ 6,608       2.9 %
Internet Sales
  $ 178,758       75.0 %   $ 165,473       71.4 %   $ 13,285       8.0 %
Contact Center Sales
  $ 59,492       25.0 %   $ 66,169       28.6 %   $ (6,677 )     -10.1 %
Total Net Sales
  $ 238,250       100.0 %   $ 231,642       100.0 %   $ 6,608       2.9 %
 
Sales may be adversely affected in fiscal 2013 due to increased competition and consumers giving more consideration to price and trading down to less expensive brands, including generics.  In response to these trends, the Company will maintain a more aggressive advertising and pricing strategy combined with expanding our product offerings to pet supplies and generics.  This more aggressive pricing strategy has resulted in a decrease to gross profit margins, and no guarantees can be made that the Company’s efforts will be successful, or that sales will grow in the future.  The majority of our product sales are affected by the seasons, due to the seasonality of mainly heartworm, and flea and tick medications.  For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2012, the Company’s sales were approximately 31%, 24%, 21%, and 24%, respectively.
 
In January 2012, the manufacturer Novartis Consumer Health, Inc. announced that it halted production of their animal health products, including the following brands: Sentinel®, Interceptor®, Program®, Deramaxx®, and Clomicalm®.  This disruption is industry wide, and at this time, there is no expected date for production to resume.  We are currently asking prescribing veterinarians to prescribe alternate brands as we run out of inventory.   This disruption in production has negatively impacted our sales, and if the disruption is prolonged it may negatively impact future sales.
 
Cost of sales
 
Cost of sales increased by $10.4 million, or 7.0%, to $158.1 million for the fiscal year ended March 31, 2012, from $147.7 million for the fiscal year ended March 31, 2011.  The increase in cost of sales is directly related to increased sales and increased product costs.  As a percentage of sales, cost of sales was 66.3% in fiscal 2012, as compared to 63.8% in fiscal 2011.  The cost of sales percentage increase can be mainly attributed to more aggressive sales pricing and increases in our product costs.
 
Gross profit
 
Gross profit decreased by $3.8 million, or 4.5%, to $80.2 million for the fiscal year ended March 31, 2012, from $84.0 million for the fiscal year ended March 31, 2011.  Gross profit as a percentage of sales for fiscal 2012 and 2011 was 33.7% and 36.2%, respectively.  The gross profit percentage decrease can be mainly attributed to more aggressive sales promotions and increases in our product costs.
 
General and administrative expenses
 
General and administrative expenses increased by $163,000, or 0.7%, to $22.4 million for the fiscal year ended March 31, 2012 from $22.2 million for the fiscal year ended March 31, 2011.  The increase in general and administrative expenses for the fiscal year ended March 31, 2012 was primarily due to the following: a $307,000 increase in payroll expenses relating to the customer care and pharmacy departments and a $220,000 increase in property expenses which was primarily related to our website.  Offsetting the increase was a $220,000 decrease in professional fees, with the majority of the decrease relating to investor relations and pharmacy fees, a $98,000 decrease in bank service fees due to a reduction in credit card fees, and a $46,000 net decrease in other expenses including telephone, office expenses, and licenses.  General and administrative expenses as a percentage of sales was 9.4% compared to 9.6% for the fiscal years ended March 31, 2012 and 2011, respectively.  The decrease in general and administrative expenses as a percentage of sales can mainly be attributed to a reduction in bank service fees and professional fees in fiscal 2012.
 
 
18

 
 
Advertising expenses
 
Advertising expenses increased by approximately $3.0 million, or 11.0%, to approximately $30.4 million for the year ended March 31, 2012, from approximately $27.4 million for the year ended March 31, 2011.  The increase in advertising expenses for fiscal 2012 can be mainly attributed to a more aggressive advertising strategy during the year.  The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $42 for both the fiscal years ended March 31, 2012 and 2011.  Advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, increased advertising spending, and price competition.  Historically, the advertising environment fluctuates due to supply and demand.  A more favorable advertising environment may positively impact future new order sales, whereas a less favorable advertising environment may negatively impact future new order sales.
 
As a percentage of sales, advertising expense was 12.8 % and 11.8% for the fiscal years ended March 31, 2012 and 2011, respectively.  The increase in advertising expense as a percentage of total sales for the fiscal year ended March 31, 2012 can be attributed to a more aggressive advertising strategy during fiscal 2012.  The Company currently anticipates advertising as a percentage of sales to be approximately 13% for fiscal 2013.  However, the advertising percentage will fluctuate quarter to quarter due to seasonality and advertising availability.  For the fiscal year ended March 31, 2012, quarterly advertising expenses as a percentage of sales ranged between 11% and 14%.
 
Depreciation
 
Depreciation increased by approximately $36,000, to approximately $1.4 million for the year ended March 31, 2012, from approximately $1.4 million for the year ended March 31, 2011.  This increase to depreciation for the year ended March 31, 2012 can be attributed to new property and equipment additions relating to the warehouse, pharmacy, and customer call center over the past 2 fiscal years.
 
Other income
 
Other income increased by approximately $96,000, to approximately $349,000 for the year ended March 31, 2012 from approximately $253,000 for the year ended March 31, 2011.  The increase to other income for the year ended March 31, 2012 can be attributed to the recognition of a federal tax penalty in fiscal 2011.  Interest income may decrease in the future as the Company utilizes its cash balances on its share repurchase plan, with approximately $14.0 million remaining as of March 31, 2012, on any quarterly dividend payment, or on its operating activities.
 
Provision for income taxes
 
For the fiscal years ended March 31, 2012 and 2011, the Company recorded an income tax provision for approximately $9.7 million and $12.4 million, respectively.  The effective tax rate for the fiscal years ended March 31, 2012 and 2011 were 36.8% and 37.3%, respectively.  The effective tax rate decrease for the fiscal year ended March 31, 2012, was due to a one-time $280,000 tax adjustment, which was recognized in fiscal 2011, to reconcile the remaining net operating loss carryforward.  The Company estimates its effective tax rate will be approximately 37.0% for fiscal 2013.
 
Net income
 
Net income decreased by approximately $4.2 million, or 20.2%, to approximately $16.7 million for the fiscal year ended March 31, 2012 from approximately $20.9 million for the fiscal year ended March 31, 2011.  The decrease was primarily due to a decrease in gross profit margins as a result of more aggressive pricing, and an increase in advertising spending to revitalize sales in fiscal 2012.
 
Fiscal 2011 Compared to Fiscal 2010
 
Sales
 
Sales decreased by approximately $6.7 million, or 2.8%, to approximately $231.6 million for the fiscal year ended March 31, 2011, from approximately $238.3 million for the fiscal year ended March 31, 2010.  The decrease in sales for the fiscal year ended March 31, 2011 was primarily due to decreased new order sales offset by an increase in reorder sales.  The decrease in new order sales may be attributed to an increase in customer
 
 
19

 
 
acquisition costs, due to a reduction in response rates, as a result of increased competition and softer demand.  The Company acquired approximately 645,000 new customers for the year ended March 31, 2011, compared to approximately 815,000 new customers for the same period the prior year.
 
The following chart illustrates sales by various sales classifications:
 
Year Ended March 31,
 
Sales (In thousands)
 
2011
   
%
   
2010
   
%
   
$ Variance
   
% Variance
 
                                     
Reorder Sales
  $ 184,341       79.6 %   $ 177,805       74.6 %   $ 6,536       3.7 %
New Order Sales
  $ 47,301       20.4 %   $ 60,461       25.4 %   $ (13,160 )     -21.8 %
Total Net Sales
  $ 231,642       100.0 %   $ 238,266       100.0 %   $ (6,624 )     -2.8 %
Internet Sales
  $ 165,473       71.4 %   $ 162,803       68.3 %   $ 2,670       1.6 %
Contact Center Sales
  $ 66,169       28.6 %   $ 75,463       31.7 %   $ (9,294 )     -12.3 %
Total Net Sales
  $ 231,642       100.0 %   $ 238,266       100.0 %   $ (6,624 )     -2.8 %
 
Sales may be adversely affected in fiscal 2012 due to increased competition and consumers giving more consideration to price and trading down to less expensive brands, including generics, some of which we may not carry.  In response to these trends, the Company implemented a more aggressive pricing strategy combined with increased advertising while continuing to expand our product offerings into pet supplies.  This more aggressive pricing strategy will result in a decrease to gross profit margins, and no guarantees can be made that the Company’s efforts will be successful, or that sales will grow in the future.
 
The majority of our product sales are affected by the seasons, due to the seasonality of mainly heartworm, and flea and tick medications.  For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2011, the Company’s sales were approximately 32%, 26%, 20%, and 22%, respectively.
 
Cost of sales
 
Cost of sales increased by $1.3 million, or 0.9%, to $147.7 million for the fiscal year ended March 31, 2011, from $146.4 million for the fiscal year ended March 31, 2010.  The increase in cost of sales is directly related to increased product costs.  As a percentage of sales, cost of sales was 63.8% in fiscal 2011, as compared to 61.4% in fiscal 2010.  The cost of sales percentage increase can be mainly attributed to more aggressive sales promotions, reduced product retail pricing, and increases in our product costs.
 
Gross profit
 
Gross profit decreased by $7.9 million, or 8.6%, to $84.0 million for the fiscal year ended March 31, 2011, from $91.9 million for the fiscal year ended March 31, 2010.  Gross profit as a percentage of sales for fiscal 2011 and 2010 was 36.2% and 38.6%, respectively.  The gross profit percentage decrease can be mainly attributed to more aggressive sales promotions, reduced product retail pricing, and increases in our product costs.
 
General and administrative expenses
 
General and administrative expenses decreased by $141,000, or 0.6%, to $22.2 million for the fiscal year ended March 31, 2011 from $22.3 million for the fiscal year ended March 31, 2010.  The decrease in general and administrative expenses for the fiscal year ended March 31, 2011 was primarily due to the following: a $153,000 decrease in insurance expenses, due to a reduction in insurance premiums; a $78,000 decrease to licenses and fees, due to a one-time charge recognized in fiscal 2010; and a $58,000 net decrease in other expenses, including telephone expenses, travel expense, bank service fees, payroll expenses, and office expenses.  Offsetting the decrease was a $60,000 increase in professional fees, which includes investor relations and pharmacy fees; a $58,000 increase in property expenses, and a $30,000 increase to bad debt expense.  General and administrative expenses as a percentage of sales was 9.6% compared to 9.4% for the fiscal years ended March 31, 2011 and 2010, respectively.  The increase in general and administrative expenses as a percentage of sales can mainly be attributed to a reduction in sales in fiscal 2011.
 
 
20

 
 
Advertising expenses
 
Advertising expenses decreased by approximately $300,000, or 1.1%, to approximately $27.4 million for the year ended March 31, 2011, from approximately $27.7 million for the year ended March 31, 2010.  The decrease in advertising expenses for fiscal 2011 can be attributed to a reduction in television remnant space inventory at prices the Company was willing to pay.  The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, increased to $42 for the year ended March 31, 2011, compared to $34 for the year ended March 31, 2010.  Advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, increased advertising spending, and price competition.
 
Historically, the advertising environment fluctuates due to supply and demand.  A more favorable advertising environment may positively impact future new order sales, whereas a less favorable advertising environment may negatively impact future new order sales.  As a percentage of sales, advertising expense was 11.8 % and 11.6% for the years ended March 31, 2011 and 2010, respectively.  The increase in advertising expense as a percentage of total sales for the year ended March 31, 2011 can be attributed to decreased sales and increased new customer acquisition costs due to a reduction in response rates, as a result of increased competition and softer demand.  The Company currently anticipates advertising as a percentage of sales to be approximately 13% for fiscal 2012.  However, the advertising percentage will fluctuate quarter to quarter due to seasonality and advertising availability.  For the fiscal year ended March 31, 2011, quarterly advertising expenses as a percentage of sales ranged between 10% and 14%.
 
Depreciation
 
Depreciation increased by approximately $54,000, or 4.1%, to approximately $1.4 for the year ended March 31, 2011, from approximately $1.3 million for the year ended March 31, 2010.  This increase to depreciation for the year ended March 31, 2011 can be attributed to an increase in new property and equipment additions relating to the warehouse, pharmacy, and customer call center over the past 2 fiscal years.
 
Other income
 
Other income increased by approximately $53,000, to approximately $253,000 for the year ended March 31, 2011 from approximately $200,000 for the year ended March 31, 2010.  The increase to other income for the year ended March 31, 2011 can be attributed to increased interest income.  Interest income may decrease in the future as the Company utilizes its cash balances on its share repurchase plan, with approximately $17.7 million remaining as of March 31, 2011, on any quarterly dividend payment, or on its operating activities.
 
Provision for income taxes
 
For the fiscal years ended March 31, 2011 and 2010, the Company recorded an income tax provision for approximately $12.4 and $14.7 million, respectively.  The effective tax rate for the fiscal years ended March 31, 2011 and 2010 were 37.3% and 36.2%, respectively.  The effective tax rate increase for the year ended March 31, 2011 was attributed to a one-time $280,000 tax charge to reconcile the remaining net operating loss carryforward in the first quarter of fiscal 2011.  The Company estimates its effective tax rate will be approximately 37.0% for fiscal 2012.
 
Net income
 
Net income decreased by approximately $5.1 million, or 19.7%, to approximately $20.9 million for the fiscal year ended March 31, 2011 from approximately $26.0 million for the fiscal year ended March 31, 2010.  The decrease was mainly attributable to the reduction in gross profit margin and new order sales in fiscal 2011.
 
 
21

 
 
Liquidity and Capital Resources
 
The Company’s working capital at March 31, 2012 and 2011 was approximately $78.2 million and approximately $80.6 million, respectively.  The $2.4 million decrease in working capital was primarily attributable to share repurchases and dividends paid during fiscal 2012, offset by cash flow generated from operations and a decrease in long term investments.  Net cash provided by operating activities was $20.4 million and $30.1 million for the fiscal years ended March 31, 2012 and 2011, respectively.  This change can be attributed to an increase in the Company’s inventory balance due to buying opportunities during fiscal 2012, compared to a more significant decrease in the Company’s inventory balance for fiscal 2011, along with a reduction in net income for fiscal 2012.  Net cash provided by investing activities was $11.6 million for the year ended March 31, 2012, compared to net cash used in investing activities of $10.8 million for the year ended March 31, 2011.  This change can be attributed to a decrease in the Company’s long term investments during fiscal 2012.  Net cash used in financing activities was $34.9 million and $22.8 million for the years ended March 31, 2012 and 2011, respectively.  This change was primarily due to the Company repurchasing approximately 2.1 million shares of its common stock for approximately $23.7 million for fiscal 2012, compared to the Company repurchasing 791,000 shares of its common stock for approximately $12.2 million in fiscal 2011.  For the years ended March 31, 2012 and 2011 the Company paid approximately $10.9 million and $10.7 million in dividends.  As of March 31, 2012 the Company had approximately $14.0 million remaining under the Company’s share repurchase plan.  Subsequent to March 31, 2012, the Company’s Board of Directors declared a $0.15 per share dividend on May 4, 2012.  The Board established a May 14, 2012 record date and a May 25, 2012 payment date.  Depending on future market conditions the Company may utilize its cash and cash equivalents on the remaining balance of its current share repurchase plan, on quarterly dividends, or on its operating activities.
 
The Company had liquidated its entire Auction Rate Security (“ARS”) balance, which was classified as long term investments in our financial statements, as of March 31, 2012.  In fiscal 2012, the Company recorded an unrealized recovery of $110,000 within accumulated other comprehensive gain (loss), based upon receiving full par value for these ARS.  In fiscal 2011, the fair value of ARS investments was based upon a valuation assessment by an outside third party, conducted in April 2011.  The Company recorded an unrealized impairment loss of $110,000, in fiscal 2011, within accumulated other comprehensive gain (loss), based upon an assessment of the fair value of these ARS.  The $110,000 impairment was recorded as temporary due to the fact that the Company had both the ability and intent to hold these securities until anticipated recovery or maturity.
 
As of both March 31, 2012 and 2011 the Company had no outstanding lease commitments except for the lease for its 65,300 square foot facility.  We are not currently bound by any long or short term agreements for the purchase or lease of capital expenditures.  Any amounts expended for capital expenditures would be the result of an increase in the capacity needed to adequately provide for any increase in our business.  To date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and anticipate this being the case in the future. Presently, we have approximately $500,000 forecasted for capital expenditures in fiscal 2013 which will be funded through cash from operations.  The Company’s primary source of working capital is cash from operations.  The Company presently has no need for alternative sources of working capital, and has no commitments or plans to obtain additional capital.
 
Off-Balance Sheet Arrangements
 
The Company had no off-balance sheet arrangements as of March 31, 2012.
 
Contractual Obligations and Commitments (In thousands)
 
           
Less than
               
More than
 
     
Total
   
1 year
   
1-2 years
   
3-5 Years
   
5 years
 
                                 
 
Property lease
  $ 2,478     $ 767     $ 784     $ 927     $ -  
 
Executive employment contract
  $ 550     $ 550     $ -     $ -     $ -  
                                           
 
Total obligations
  $ 3,028     $ 1,317     $ 784     $ 927     $ -  
 
Recent Accounting Pronouncements
 
The Company does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.
 
 
22

 
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market risk generally represents the risk that losses may occur in the value of financial instruments as a result of movements in interest rates, foreign currency exchange rates, and commodity prices.  Our financial instruments include cash and cash equivalents, short term investments, accounts receivable, and accounts payable.  The book values of cash equivalents, short term investments, accounts receivable, and accounts payable are considered to be representative of fair value because of the short maturity of these instruments.  Interest rates affect our return on excess cash and investments.  As of March 31, 2012, we had $46.8 million in cash and cash equivalents and $10.3 million in short term investments.  A majority of our cash and cash equivalents and investments generate interest income based on prevailing interest rates.
 
A significant change in interest rates would impact the amount of interest income generated from our excess cash and investments.  It would also impact the market value of our investments.  Our investments are subject to market risk, primarily interest rate and credit risk.  Our investments are managed by a limited number of outside professional managers within investment guidelines set by our Board of Directors.  Such guidelines include security type, credit quality, and maturity, and are intended to limit market risk by restricting our investments to high-quality debt instruments with both short and long term maturities.  We do not hold any derivative financial instruments that could expose us to significant market risk.  At March 31, 2012, we had no debt obligations.
 
 
23

 
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  PETMED EXPRESS, INC. AND SUBSIDIARIES
 
  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
Page
     
Report of Independent Registered Public Accounting Firm
 
25
     
Consolidated Balance Sheets as of March 31, 2012 and 2011
 
26
     
Consolidated Statements of Income for each of the three years in the period ended March 31, 2012
 
27
     
Consolidated Statements of Changes in Shareholders’ Equity for each of the three years in the period ended March 31, 2012
  28
     
Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2012
 
29
     
Notes to Consolidated Financial Statements
 
30
     
Report of Management on Internal Control Over Financial Reporting
 
42
     
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
 
43
     
 
 
24

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders
PetMed Express, Inc. and subsidiaries
 
We have audited the accompanying consolidated balance sheets of PetMed Express, Inc. and subsidiaries as of March 31, 2012 and 2011, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2012.  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 the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PetMed Express, Inc. and subsidiaries as of March 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2012, in conformity with U.S. generally accepted accounting principles. 
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PetMed Express, Inc. and subsidiaries’ internal control over financial reporting as of March 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 29, 2012 expressed an unqualified opinion on the effectiveness of PetMed Express, Inc. and Subsidiaries’ internal control over financial reporting.
 
/s/ McGladrey LLP
 
McGladrey LLP
 
Fort Lauderdale, Florida
May 29, 2012
 
 
25

 
 
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
   
March 31,
   
March 31,
 
   
2012
   
2011
 
             
  ASSETS            
             
Current assets:
           
Cash and cash equivalents
  $ 46,801     $ 49,660  
Short term investments - available for sale
    10,347       10,116  
Accounts receivable, less allowance for doubtful accounts of $5 and $6, respectively
    1,572       1,985  
Inventories - finished goods
    26,217       25,140  
Prepaid expenses and other current assets
    1,241       1,036  
Deferred tax assets
    1,230       1,003  
Prepaid income taxes
        199       664  
Total current assets
    87,607       89,604  
                 
Long term investments
    -       12,390  
Property and equipment, net
    2,597       3,433  
Intangible asset
    860       860  
                 
Total assets
  $ 91,064     $ 106,287  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Accounts payable
  $ 6,619     $ 6,452  
Accrued expenses and other current liabilities
    2,772       2,509  
Total current liabilities
    9,391       8,961  
                 
Deferred tax liabilities
    492       321  
                 
Total liabilities:
    9,883       9,282  
                 
Commitments and contingencies
               
                 
Shareholders’ equity:
               
Preferred stock, $.001 par value, 5,000 shares authorized; 3 convertible shares issued and outstanding with a liquidation preference of $4 per share
    9       9  
Common stock, $.001 par value, 40,000 shares authorized; 20,338 and 22,331 shares issued and outstanding, respectively
    20       22  
Retained earnings
    81,108       97,115  
Accumulated other comprehensive gain (loss)
    44       (141 )
                 
Total shareholders’ equity
    81,181       97,005  
                 
Total liabilities and shareholders’ equity
  $ 91,064     $ 106,287  
 
See accompanying notes to consolidated financial statements.
 
 
26

 
 
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share amounts)
 
   
Year Ended March 31,
 
   
2012
   
2011
   
2010
 
                   
Sales
  $ 238,250     $ 231,642     $ 238,266  
Cost of sales
    158,085       147,686       146,405  
                         
Gross profit
    80,165       83,956       91,861  
                         
Operating expenses:
                       
General and administrative
    22,363       22,200       22,341  
Advertising
    30,369       27,357       27,657  
Depreciation
    1,411       1,375       1,321  
Total operating expenses
    54,143       50,932       51,319  
                         
Income from operations
    26,022       33,024       40,542  
                         
Other income (expense):
                       
Interest income, net
    288       381       196  
Other, net
    61       (128 )     4  
Total other income
    349       253       200  
                         
Income before provision for income taxes
    26,371       33,277       40,742  
                         
Provision for income taxes
    9,712       12,406       14,740  
                         
Net income
  $ 16,659     $ 20,871     $ 26,002  
                         
Net income per common share:
                       
Basic
  $ 0.81     $ 0.93     $ 1.15  
Diluted
  $ 0.80     $ 0.92     $ 1.14  
                         
Weighted average number of common shares outstanding:
                       
Basic
    20,613       22,514       22,617  
Diluted
    20,708       22,643       22,746  
                         
Cash dividends declared per common share
  $ 0.525     $ 0.475     $ 0.300  
 
See accompanying notes to consolidated financial statements.
 
 
27

 
 
PETMED EXPRESS, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 Fiscal years ended March 31, 2010, March 31, 2011, and March 31, 2012
 (In thousands)
   
Convertible
   
Common
   
Additional
               
Other
       
   
Preferred Stock
   
Stock
   
Paid-In
   
Retained
   
Treasury
   
Comprehensive
       
   
Shares
   
Amounts
   
Shares
   
Amounts
   
Capital
   
Earnings
   
Stock
   
Gain (Loss)
   
Total
 
                                                       
Balance, March 31, 2009
    3     $ 9       22,687     $ 23     $ -     $ 75,156     $ -     $ (220 )   $ 74,968  
                                                                         
Issuance of common stock from exercise of stock options
    -       -       102       -       735       -       -       -       735  
                                                                         
Issuance of restricted stock
    -       -       201       -       -       -       -       -       -  
                                                                         
Share based compensation
    -       -       -       -       1,594       -       -       -       1,594  
                                                                         
Tax benefit related to stock options exercised
    -       -       -       -       299       -       -       -       299  
                                                                         
Dividends declared
    -       -       -       -       -       (6,853 )     -       -       (6,853 )
                                                                         
Net income
    -       -       -       -       -       26,002       -       26,002       26,002  
                                                                         
Other comprehensive loss:
                                                                       
Net Change in unrealized gain on long term investments
                                                            112       112  
                                                                         
Total comprehensive income
                                                          $ 26,114       -  
                                                                         
Balance, March 31, 2010
    3       9       22,990       23       2,628       94,305       -       (108 )     96,857  
                                                                         
Issuance of common stock from exercise of stock options
    -       -       46       -       340       -       -       -       340  
                                                                         
Issuance of restricted stock, net
    -       -       86       -       -       -       -       -       -  
                                                                         
Share based compensation
    -       -       -       -       2,171       -       -       -       2,171  
                                                                         
Dividends declared
    -       -       -       -       -       (10,822 )     -       -       (10,822 )
                                                                         
Repurchased and retired shares
    -       -       (791 )     (1 )     (12,246 )     -       -       -       (12,247 )
                                                                         
Deferred tax adjustment related to resticted stock and stock options
    -       -       -       -       (132 )     -       -       -       (132 )
                                                                         
Allocation of retirement of repurchased shares of additional paid in capital and retained earnings
    -       -       -       -       7,239       (7,239 )     -       -       -  
                                                                         
Net income
    -       -       -       -       -       20,871       -       20,871       20,871  
                                                                         
Other comprehensive loss:
                                                                       
Net Change in unrealized loss on short term investments
                                                            (31 )     (31 )
Net Change in unrealized loss on long term investments
                                                            (2 )     (2 )
                                                                         
Total comprehensive income
                                                          $ 20,838       -  
                                                                         
Balance, March 31, 2011
    3       9       22,331       22       -       97,115       -       (141 )     97,005  
                                                                         
Issuance of restricted stock, net
    -       -       91       -       -       -       -       -       -  
                                                                         
Share based compensation
    -       -       -       -       2,246       -       -       -       2,246  
                                                                         
Dividends declared
    -       -       -       -       -       (10,989 )     -       -       (10,989 )
                                                                         
Repurchased and retired shares
    -       -       (2,084 )     (2 )     (23,683 )     -       -       -       (23,685 )
                                                                         
Deferred tax adjustment related to resticted stock
    -       -       -       -       (240 )     -       -