Item 1B.
Unresolved Staff Comments.
None.
The Company currently leases an approximately 100,000 square foot facility in Littleton, MA for the corporate headquarters, main call center, warehouse, and fulfillment center. The Company uses approximately 92,000 square feet for warehouse space and the remaining space office space. The Littleton lease was amended October 1, 2010 and expires September 30, 2020. We have one five-year option to renew thereafter.
The Company leases approximately 1,800 square feet of space in North Conway, NH for use as a satellite call center and for our creative design offices. We lease approximately 5,100 square feet of space in Denton, TX for use as a satellite call center and additional offices.
As of December 31, 2010, we leased approximately 97,000 square feet of space for our thirteen retail stores located in Massachusetts (1), Virginia (3), New Hampshire (1), Maryland (2), Delaware (1), Texas (2), New Jersey (1), Georgia (1) and Rhode Island (1).
From time to time, the Company is exposed to litigation relating to our products and operations. The Company is not currently engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material, adverse affect on our financial condition or results of operations.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information.
The Company’s common stock trades on The NASDAQ Stock Market LLC under the symbol “DOVR”. As of March 7, 2011, the record date for our 2011 Annual Meeting of Stockholders, the number of holders of record of our common stock was 28 and the approximate number of beneficial owners was 806.
The following table sets forth, for the periods indicated, the high and low sales prices for our common stock for each full quarterly period within the two most recent fiscal years, as reported on the NASDAQ Stock Market LLC:
The Company has never declared or paid any cash dividends on our common stock. We currently intend to retain any earnings for use in the operation and expansion of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. Moreover, our current revolving credit facility and term note contains provisions which restrict our ability to pay dividends.
The information required to be disclosed by Item 201(d) of Regulation S-K, “Securities Authorized for Issuance Under Equity Compensation Plans,” and by Item 201(e) of Regulation S-K, “Performance Graph”, is included under Item 12 of Part III of this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities.
The Company did not issue or sell any equity securities in the twelve months ended December 31, 2010, other than (as previously reported) as the result of exercise in June 2010 of certain vested stock options by a senior executive officer of the Company, resulting in $19,722 of Additional Paid in Capital, which the Company applied in full for general working capital purposes during the three months ended June 30, 2010.
As noted in Part II, Item 9B of this Annual Report on Form 10-K, the Company refinanced its credit facilities as of March 28, 2011. As the result of such refinancing, the Company borrowed $5,500,000 pursuant to a term loan from its senior lender, RBS Citizens Bank N.A., and used the proceeds to pay off and discharge the principal and interest of its senior subordinated debt held by BCA Mezzanine Fund, LP, Cephas Capital Partners, LP, and SEED Ventures, LP.
For history of the Company’s debt and equity financing activity prior to January 1, 2010, see Part II, Item 5 of the Company’s Annual Report on Form 10-K for the fiscal year ending December 31, 2009, as filed with the SEC on March 31, 2010.
Issuer Purchases of Equity Securities
During the fiscal quarter ended December 31, 2010, there were no repurchases made by us or on our behalf, or by any “affiliated purchasers” of shares of our common stock.
Not Applicable to Smaller Reporting Company
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Annual Report on Form 10-K, including the following discussion, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, the words “projected”, “anticipated”, “planned”, “expected”, and similar expressions are intended to identify forward-looking statements. In particular, statements regarding a rebounding economy, retail store expansion and business growth are forward-looking statements. Forward-looking statements are not guarantees of our future financial performance, and undue reliance should not be placed on them. Our actual results, performance or achievements may differ significantly from the results, performance and achievements discussed in or implied by the forward-looking statements. Factors that could cause such a difference include material changes to Dover Saddlery, Inc.’s business or prospects, in consumer spending, fashion trends or consumer preferences, or in general political, economic, business or capital market conditions and other risks and uncertainties, including but not limited to the other factors that are detailed in “Item 1A. Risk Factors.” We disclaim any intent or obligation to update any forward-looking statements.
Overview
The Company is the leading specialty retailer and the largest multi-channel marketer of equestrian products in the U.S. For over 35 years, Dover Saddlery has been a premier upscale marketing brand in the English-style riding industry. We sell our products through a multi-channel strategy. This multi-channel strategy has allowed us to use catalogs and our proprietary database of over two million names of equestrian enthusiasts as a primary marketing tool to increase catalog sales and to drive additional business to our e-commerce websites and retail stores.
In November of 2005, Dover Saddlery was taken public using the Open IPO ® process. The proceeds of that offering were used to retire debt and launch our retail rollout.
The Company’s strategy for growth has been to open additional retail stores using the proprietary, mathematical, store optimization model to select the sites. Our initial target of opening 50 retail locations in addition to the 3 stores operating at the IPO, is now 20% complete, with 10 new locations since our IPO. For 2011 through 2013, the Company estimates that it could open on average two stores annually from cash flow and borrowing under its line of credit from its bank and may proceed under that plan if and as the economy improves. In order to open more than two stores per year, the Company may need to raise additional debt and/or equity capital. Depending on the store size in terms of area, the local lease and construction rates which vary widely across the country, the Company estimates that it would need to invest between $650,000 to $1,200,000 to pay for fixtures, equipment, leasehold improvements, inventory and pre-opening expenses for each store opened. The Company makes no representation that it will open any new stores in the next few years or what each store shall cost to open.
The recession that ended in 2009 was a difficult operating environment for our industry as a result of numerous external factors that led to all time historical lows in consumer confidence which resulted in a contraction in specialty retail consumer spending. In 2010, our prior three-year investment in our retail expansion generated a 4.8% increase in retail market channel revenues, to partially offset the economic drop in direct channel revenues, resulting in $78.2 million in total revenues. Our aggressive cost controls and overhead efficiencies throughout the Company, and carefully managed utilization of marketing resources, generated an Adjusted EBITDA * of $5.1 million, an increase of 25.3% over the 2009 results. The resulting net income was $2,045,000, or $0.38 per diluted share. The Company utilized the resulting strong operating cash flow to reduce our revolving line of credit by $3.0 million, strengthen our balance sheet, and place the Company in a strategic position for growth as the retail economy improves.
The Company developed several short-term strategies to maintain or expand market share, reduce operating costs and reduce capital expenditures. In order to manage our way through these uncertain times, our retail expansion has been strategically slowed, and we will be extremely opportunistic in negotiating existing and potentially new leases. Management believes new retail space lease costs should show a total decline resulting in enhanced store profitability for new stores opened with a lower lease cost.
The Company believes that the following strategic actions, initiated in 2009 and continuing into 2010 allowed it to successfully weather the recent recession and generate positive growth in sales and earnings as consumer confidence improved and the economy turned around. These are:
•
Aggressive cost control particularly in the area of targeted marketing, direct labor in the warehouse call center and retail stores, and management salaries.
•
Reduction in capital expenditures by curtailing store expansion and being extremely opportunistic in present and future lease negotiations.
•
Careful monitoring of same store sales growth and direct marketing response rates in order to determine when the Company’s customers have returned to normal spending behavior, which will allow Dover to increase its marketing activities.
In this time of economic uncertainty, it is very difficult to accurately predict economic trends; however, improving economic indicators such as falling unemployment rates and expanding GDP and increased buying from our customer base, gives us the confidence to restart our store expansion strategy in 2011.
*
We reference Adjusted EBITDA in this Overview because we consider it an important supplemental measure of our performance; indeed, the Company ties its executive and employee bonus pools directly to this measure. Also, we believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Its definition and limitations are set forth in this section under “Results of Operations”, Management’s Discussion and of Analysis and Financial Condition and Results of Operations, of Item 7 of this Annual Report on Form 10-K.
Consolidated Performance and Trends
The Company reported consolidated net income for the year ended December 31, 2010 of $2,045,000 or $0.38 per diluted share. This is compared to net income of $904,000 or $0.17 per diluted share for the corresponding period in 2009.
The 2010 results reflect our recent efforts to strengthen earnings as we wait for the economy to stabilize before resuming our retail growth strategy, where revenues increased 4.8% to $26.0 million for the year ended 2010. This trend of slow revenue growth but improved earnings will be replaced by resumption of our new store expansion strategy under which sales will grow more rapidly and operating profit margins may be suppressed by opening new stores We respond to fluctuations in revenues primarily by delaying the opening of new stores, adjusting marketing efforts and operations to support our retail stores and manage costs, as well as continuing to focus on our proprietary store, optimization modeling to determine the rate and location of new store openings. Our direct market channel revenues increased 1.6%, to $52.1 million for the year ended December 31, 2010. We respond to fluctuations in our direct customers’ response by adjusting the quantities of catalogs mailed and other marketing and customer-related strategies and tactics in order to maximize revenues and manage costs. As we open more stores some sales from the direct channel may shift to the retail channel but eventually direct and retail sales from new store openings will significantly increase for the trade area around the new stores.
Revenues
The Company markets and sells the most comprehensive selection of products in the equestrian industry. We currently derive our revenues from product sales from two integrated market channels: direct and retail. Our direct market channel generates product sales from both catalog mailings and Internet marketing, and our retail store sales consist of product sales generated by our retail market channel. We sell to the English-style riding market through our Dover Saddlery brand and to the Western-style riding market through our Smith Brothers brand.
In 2010, approximately 66.7% of our revenues were generated by our direct market channel and 33.3% were generated by our thirteen retail stores, which increased from the 32.6% of retail sales in 2009, due primarily from gains achieved from improved consumer spending and promotions. All revenues are recorded net of product returns.
Revenues from our product sales are seasonal. In addition, our revenues can be affected by the timing of our catalog mailings. In 2010, 30.0% of our annual revenues were generated in the fourth quarter.
Cost of Revenues
The most significant components of the Company’s cost of revenues are product, purchasing, handling and transportation costs to obtain the products and ship them to our customers. We manage our integrated merchandising efforts by forming positive relationships with over 600 suppliers to ensure competitive costs and the most up-to-date and complete product offering for our customers. We have implemented procedures to promote labor efficiencies in the handling of our products. In addition, we work closely with transportation companies in negotiating competitive rate structures to minimize our freight costs.
Gross Profit
The Company’s gross profit as a percentage of revenues varies according to the season of the year and the mix of products sold. Our gross profit may not be comparable to other specialty retailers, as some companies include all of the costs related to distribution in cost of revenues while others, like us, exclude all or a portion of the costs related to distribution from cost of revenues and include them in selling, general and administrative expenses.
Selling, General and Administrative Expenses
The Company’s selling, general and administrative expenses consist primarily of:
•
advertising, marketing and other brand-building costs, primarily associated with developing, printing and distributing our catalogs and purchasing internet advertising;
•
labor and related costs for order processing, and salaries and related costs for marketing, creative, administrative and executive personnel;
•
infrastructure costs, insurance, utilities and information system costs;
•
credit card processing fees;
•
occupancy and other overhead costs;
•
store pre-opening costs;
•
public company, professional fees and other legal, accounting and related costs; and
•
non-cash, stock-based compensation
As the long-term strategy will continue to focus on increasing our market penetration and continuing to build brand awareness, we anticipate that selling, general and administrative expenses will continue to increase in absolute dollars for the foreseeable future. Total selling, general and administrative costs as a percentage of our revenues are not likely to decrease in the foreseeable future as we intend to continue to take advantage of our market-leading position in the equestrian industry by building on the Dover Saddlery and Smith Brothers brands. We also expect our general and administrative expenses will remain high due to our operations as a public company.
Fiscal Periods
Our fiscal year ends on December 31, and our fiscal quarters end on March 31, June 30, September 30 and December 31.
Results of Operations
The following table sets forth results of operations for the periods shown (dollars in thousands):
(1)
Includes twelve Dover-branded stores and one Smith Brothers store.
(2)
When we use the term “Adjusted EBITDA”, we are referring to net income minus interest income and other income plus interest expense, income taxes, non-cash stock-based compensation, depreciation, amortization and other investment income, net. We present Adjusted EBITDA because we consider it an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.
Adjusted EBITDA has some limitations as an analytical tool and you should not consider it in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities or any other measure calculated in accordance with U.S. generally accepted accounting principles. Some of the limitations are:
•
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or capital commitments;
•
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•
Adjusted EBITDA does not reflect the impact of an impairment charge that might be taken, when future results are not achieved as planned, in respect of goodwill resulting from any premium that the Company might pay in the future in connection with potential acquisitions;
•
Adjusted EBITDA does not reflect the interest expense or cash requirements necessary to service interest or principal payments on our debt;
•
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
•
Although stock-based compensation is a non-cash charge, stock options previously awarded, together with additional stock options that might be granted in the future, might have a future dilutive effect on earnings and EPS;
•
Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
The following table reconciles net income to Adjusted EBITDA (in thousands):
The following table sets forth our results of operations as a percentage of revenues for the periods shown:
(1)
Certain of these amounts may not sum properly due to rounding.
Comparison of Years Ended December 31, 2010 and 2009
Revenues
Our total revenues increased by $2.0 million, or 2.6%, to $78.2 million for the twelve months ended December 31, 2010 from $76.2 million for the twelve months ended December 31, 2009. Revenues in our direct market channel increased $0.8 million, or 1.6%, to $52.1 million from $51.3 million in the corresponding period in 2009. Revenues in our retail market channel increased $1.2 million, or 4.8%, to $26.0 million. The increase in our direct market channel was due to improved consumer spending in the second, third and fourth quarters, with fewer catalogs mailed. The increase in revenues from our retail market channel was due primarily to improved consumer spending and promotions. Same store sales for the twelve month period increased 2.9% over the prior year, attributable to improved second, third and fourth quarter results.
Gross Profit
Gross profit for the twelve months ended December 31, 2010 increased $0.8 million, or 2.9%, to $29.7 million from $28.9 million for the corresponding period in 2009. Gross profit, as a percentage of revenues, for the twelve months ended December 31, 2010 increased 0.1% to 38.0% from 37.9% for the corresponding period in 2009. The increase in gross profit of $0.8 million was attributable to increased revenues and improved product margins. The slight increase in gross profit as a percentage of revenues was attributable to variations in our overall product mix.
Selling, General and Administrative
Selling, general and administrative expenses were reduced $0.2 million, or 0.8%, for the twelve months ended December 31, 2010 to $25.5 million from $25.7 million for the corresponding period in 2009. SG&A expenses, as a percentage of revenues, were reduced to 32.6% of revenues from 33.7% of revenues for the corresponding period in 2009. Reductions in catalog and retail development costs offset by increases in labor costs and facility costs in support of retail market channel revenue growth.
Interest Expense
Interest expense, including amortization of deferred financing costs attributed to our subordinated debt and revolving credit facility, was reduced by 21.4% to $1,030,000 in 2010 as a result of reduced debt levels as compared to 2009.
Other Investment Income
Net income (loss) from investment activities consists of the Company’s share of net earnings or loss of its affiliate as they occur. The Company’s net investment income in 2010 was $314,000, an increase of $358,000 over its net investment loss of $44,000 in 2009. The Company’s investment income (loss) from investment activities is related to our investments in Hobby Horse Clothing Company, Inc. (“HH”) and HorsePharm, LLC. The Company’s share of HH’s net income in 2010 included the non-recurring gain of $402,000 on the proceeds from a life insurance settlement contract on a former officer of HH, (See “investment in Affiliates” for further detail of these investments).
Income Tax Provision
The provision for income taxes was $1.5 million for the twelve months ended December 31, 2010, reflecting an effective tax rate of 41%, compared to $0.9 million for the corresponding period in 2009, reflecting an effective tax rate of 50%. The effective tax rate declined from 2009 to 2010 primarily due to the deductibility of 80% of the dividend received from the Hobby Horse investment as, discussed above.
Net Income
The net income for the twelve months ended December 31, 2010 increased $1,141,000 or 126%, to $2,045,000 from $904,000 for the corresponding period in 2009. This increase in profitability of $1.1 million was due primarily to increased revenues, improved gross margin, strategic cost reductions and the one-time gain on investment in the second quarter of 2010, as discussed above. The resulting income per diluted share increased to $0.38 for the twelve months ended December 31, 2010 as compared to $0.17 for the corresponding period in 2009.
Non-GAAP Financial Measures and Information
From time to time, in addition to financial results determined in accordance with generally accepted accounting principles in the United States (“GAAP”), the Company provides financial information determined by methods other than in accordance with GAAP. The Company’s management uses these non-GAAP measures in its analysis of the Company’s performance and ongoing operations. For example, the Board of Directors has a long-standing policy to use Adjusted EBITDA (defined in “Results of Operations” of Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Item 7 of our Annual Report on Form 10-K) in determining the availability and amounts of bonus awards for the Company’s senior management and key employees. The Company believes that these non-GAAP operating measures supplement our GAAP financial information and provide useful information to investors for evaluating the Company’s operating results, and trends that may be affecting the Company’s business, as they allow investors to more readily compare our operations to prior financial results, and our future performance. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
Seasonality and Quarterly Fluctuations
Since 2001, our quarterly product sales have ranged from a low of approximately 20% to a high of approximately 32% of any calendar year’s results. The beginning of the spring outdoor riding season in the northern half of the country has typically generated a slightly stronger second quarter of the year, and the holiday buying season in the fourth quarter has generated additional demand for our normal equestrian product lines. Revenues for the first and third quarters of the calendar year have tended to be somewhat lower than the second and fourth quarters. We anticipate that our revenues will continue to vary somewhat by season. The timing of our new retail store openings has had, and is expected to continue to have, a significant impact on our quarterly results. We will incur one-time expenses related to the opening of each new store. As we open new stores, (i) revenues may spike and then settle, and (ii) pre-opening expenses, including occupancy and management overhead, are incurred, which may not be offset by correlating revenues during the same financial reporting period. As a result of these factors, new retail store openings may result in temporary declines in operating profit, both in dollars and as a percentage of sales.
Liquidity and Capital Resources
For the year ended December 31 2010, we increased our cash by $13,000. Cash was utilized primarily for seasonal working capital requirements and capital expenditures for retail store renovations as well as settling our outstanding balance with our revolving line of credit. The source for cash generated related to increased balances in depreciation and amortization, accrued expense and receivables. The Company was in compliance with all covenants under both credit facilities as of December 31, 2010. On March 28, 2011 the Company amended its line of credit facility with the bank with the potential to increase the available credit from $13,000,000 up to $20,000,000 at the bank’s discretion. On March 28, 2011 the Company also refinanced the $5,000,000 Senior Subordinated Notes plus deferred interest from proceeds of a $5,500,000 term note facility from the bank at a reduced interest rate.
If necessary, we plan in the future to seek additional financing from banks, or through public offerings or private placements of debt or equity securities, strategic relationships, or other arrangements. In the event we fail to meet our financial covenants with our bank, we may not have access through our line of credit to sufficient working capital to pursue our growth strategy, or if our covenant non-compliance triggers a default, our loans may be called requiring the repayment of all amounts on our loans.
Operating Activities
Cash provided by our operating activities for the year ended December 31, 2010 was $3.7 million compared to cash provided by operating activities of $5.6 million for the corresponding period in 2009. For the year ended December 31, 2010, cash outflows consisted primarily of an increase in inventory of $0.6 million, reduction in non-cash investment income of $0.3 million, reduction in deferred taxes of $0.3 million and reductions in accounts payable of $0.2 million. Cash inflows were attributable to the results of operations which consisted of net income, non-cash expenses of depreciation, amortization, non-cash interest, accruals, prepaid assets, accounts receivable and other expenses, which totaled $5.1 million. For the year ended December 31, 2009, cash inflows consisted primarily of planned reductions in inventory of $2.0 million, prepaid catalog and other current assets of $0.7 million as well as increases in accounts payable and accrued expenses, other current liabilities and income taxes payable of $0.1 million and $0.8 million, respectively. Cash utilized for the year ended December 31, 2009 consisted of the reduction in deferred taxes of $0.3 million.
Investing Activities
Cash generated from our investing activities was $14,000 for the year ended December 31, 2010 compared to cash used of $269,000 for the corresponding period in 2009. Investing activities in 2010 included retail store renovation costs, a dividend from the Hobby Horse investment and an investment in the Company’s joint venture with HorsePharm. We anticipate increasing investments by adding stores in 2011 and beyond.
Financing Activities
Net cash used in our financing activities was $3.7 million for the year ended December 31, 2010. We reduced our revolving credit facility by $3.0 million and our outstanding checks were $0.6 million. For the year ended December 31, 2009, net cash used in our financing activities was $5.1 million. We reduced our revolving credit facility by $5.3 million, which was offset by the change in outstanding checks of $0.2 million and proceeds from exercising stock options of $0.2 million for the year ended December 31, 2009.
Revolving Credit Facility
On March 27, 2009, the Company amended its senior revolving credit facility with RBS Citizens Bank N.A. to adjust various covenant levels for fiscal year 2009, due to the on-going impact of the economic recession. In addition, the maximum amount to be borrowed was reduced from $18,000,000 to $14,000,000 in 2009, through June 2010, and was further reduced to $13,000,000 on June 30, 2010. As of December 31, 2010, the revolving credit facility borrowing limit was $13,000,000, subject to certain covenants, and there was no outstanding balance. Borrowings were secured by substantially all of the Company’s assets. Under the terms of this credit facility, the Company was subject to various covenants. At December 31, 2010, the Company was in compliance with all of the original covenants under the credit facility. The Company and the bank amended the senior revolving credit agreement on August 10, 2010 to extend the loan to February 2012. The loan was originally due in full in January 2011.
On March 28, 2011, the Company and the bank amended the credit agreement in connection with the refinancing of the $5,000,000 senior subordinated notes. Under the amended revolving line of credit, the Company can borrow up to $13,000,000, of which up to $1,000,000 can be in the form of letters of credit, and increase this amount up to $20,000,000 at the discretion of the bank. Any outstanding balances borrowed under the credit facility are due on April 30, 2013. The credit facility bears interest at the base rate, announced from time to time by the bank, plus an applicable margin determined by the Company’s funded debt ratio. As of March 28, 2011, the LIBOR rate (base rate) was 0.26%, plus the applicable margin of 2.20%. Interest is payable monthly. At its option, the Company may have all or a portion of the unpaid principal under the credit facility bear interest at various LIBOR or prime rate options.
The Company is obligated to pay commitment fees of 0.20% per annum on the average daily, unused amount of the line of credit during the preceding quarter. All assets of the Company collateralize the senior revolving credit facility. Under the terms of the credit facility, the Company is subject to certain covenants including, among others, maximum funded debt ratios, maximum debt to tangible net worth ratios, minimum fixed charge ratios, current asset ratios, and capital expenditures.
Senior Subordinated Notes Payable and Warrants
On December 11, 2007, the Company entered into a subordinated loan agreement with BCA Mezzanine Fund, LP, Cephas Capital Partners, LP, and SEED Ventures, LP (jointly, the “Subordinated Holders”), which provided for the issuance of a senior subordinated note payable, which was due in full on December 11, 2012, for aggregate proceeds of $5,000,000. The note was subordinated in right of payment to existing and future senior debt, ranked equal in right of payment with any future senior subordinated debt and was senior in right of payment to any future subordinated debt. Interest accrued at an annual rate of 14%, of which 12% was payable quarterly in arrears on the fifth business day of the following month. The remaining 2% per annum was deferrable, and if deferred, was compounded annually and due in full on December 11, 2012. As of December 31, 2010, the Company had deferred $397,978 of interest. Prepayment on the principal amount due under the note may have been made voluntarily at any time, plus accrued and unpaid interest and a prepayment fee of 3% if paid after December 11, 2009 and 0% if paid after December 11, 2010. Under the terms of this senior subordinated credit facility, the Company was subject to various covenants. As of December 31, 2010, the balance of the subordinated notes was $5.0 million plus the deferred interest of $397,947 less the unamortized portion of the discount of $104,470, and the Company was in compliance with all of its covenants under the credit facility. On March 27, 2009, the Company amended the subordinated loan agreement to adjust various covenant levels for the fiscal year 2009, due to the on-going impact of the economic recession. As of December 31, 2010, the Company was in compliance with all of its original covenants under the credit facility.
Simultaneously with the issuance of this note, we issued warrants to the Subordinated Holders, exercisable at any time after December 11, 2007, for an initial 118,170 shares of our common stock at an initial exercise price of $3.96 per share. The number of shares to be received for the warrants, upon exercise, was subject to change in the event of additional equity issuances and/or stock splits. In September of 2009, with the prior approval of the Board, the Company modified certain terms of the warrants and reduced the exercise price to $2.75 per share. Upon repayment of the senior subordinate notes in March of 2011, the 118,170 warrants remain outstanding and are exercisable until December 2016. A charge of $36,000 was recognized in conjunction with the warrant modification and included in interest expense.
On March 28, 2011, the Company borrowed $5,500,000 in the form of a 7-year term note from the bank to refinance the $5,000,000 senior subordinated notes and deferred interest on those notes. The term note bears fixed interest currently estimated at 7.2% on $3,900,000 of the principal and floating interest on the remaining $1,600,000 of the principal based on a base rate, with a minimum of 1.0% and announced from time to time by the bank, plus an a 4.4% margin. The Company shall purchase interest rate swaps in order to effectively fix the interest rate at approximately 7.2%. As of March 28, 2011, the LIBOR rate (base rate) was 0.26%. Interest is payable monthly. The Company is obligated to repay $786,000 of principal annually commencing in April 2013 and extending to March 2018. The Company is further obligated to accelerate repayment of up to $1,600,000 in principal in the event it has excess cash flow determined by a cash flow recapture formula. All assets of the Company collateralize the term note facility. Under the terms of the term note facility, the Company is subject to certain covenants including, among others, maximum funded debt ratios, maximum debt to tangible net worth ratios, minimum fixed charge ratios, current asset ratios, and capital expenditures. The Company expects to realize significant interest savings as a result of refinancing the senior subordinated notes.
Working Capital and Capital Expenditure Needs
The Company believes that existing cash, cash equivalents, expected cash to be provided by our operating activities, and funds available through our revolving credit facility will be sufficient to meet our currently planned working capital and capital expenditure needs over at least the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our marketing and sales activities, the addition of new retail stores, the acquisition of new capabilities or technologies and the continuing market acceptance of our products. To the extent that existing cash, cash equivalents, cash from operations and cash from our revolving credit facility under the conditions and covenants of our credit facilities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Although we are currently not a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, businesses, services or technologies which we anticipate would require us to seek additional equity or debt financing, we may enter into these types of arrangements in the future. There is no assurance that additional funds would be available on terms favorable to us or at all. Funds from our revolving credit facility may not be available if we fail to meet the financial covenants contained in the loan agreements with our lenders. At December 31, 2010, the Company was in compliance with all of its covenants under the credit facility.
Off-Balance Sheet Arrangement
As of December 31, 2010, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.
Critical Accounting Policies and Estimates
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates.
The Company believes that of our significant accounting policies, which are described in the notes to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, we believe that the following accounting policies are the most critical to fully understanding and evaluating our consolidated financial condition and results of operations
Revenue Recognition
Revenues are recognized when payment is reasonably assured, the product is shipped and title and risk of loss have transferred to the customer. For direct merchandise sales, this occurs when product is delivered to the common carrier at the Company’s warehouse. For retail sales, this occurs at the point of sale. For the periods presented, merchandise returns have been consistent; resulting in reserves of $869,000 and $793,000 for the years ended December 31, 2010 and 2009, respectively. We do not anticipate changes to the future trends of our merchandise returns.
Shipping and handling fees charged to the customer are recognized at the time the products are shipped to the customer and are included in net revenues. Shipping costs are included in cost of goods sold.
Inventory Valuation
Inventory consists of finished goods in the Company’s mail-order warehouse and retail stores. The Company’s inventory is stated at the lower of cost, with cost determined by the first-in, first-out (FIFO) method, or net realizable value. The Company maintains a reserve for excess and obsolete inventory. This reserve was $95,000 for the years ended December 31, 2010 and 2009. The Company continuously monitors the salability of its inventories to ensure adequate valuation of the related merchandise. Inventory valuation charges have remained consistent throughout each period presented. We do not foresee any change to this trend which currently recognizes annual valuation charges below that of the period end reserve balances.
Advertising Costs and Catalog Expenses
The costs of direct-response advertising materials, primarily catalog production and distribution costs, are deferred. These costs are recognized over the period of expected future revenue, which is less than one year. Advertising costs not related to our direct response catalogs and marketing activities are expensed as incurred.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities and net operating loss and credit carry forwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when it is more likely than not that some portion of the deferred tax assets will not be realized.
The Company has reviewed its tax positions to determine whether the positions are more likely than not to be sustained upon examination by regulatory authorities. If a tax position meets the more-likely-than-not standard, then the related tax benefit is measured based on a cumulative probability analysis of the amount that is more-likely-than-not to be realized upon ultimate settlement or disposition of the underlying issue. At December 31, 2010 the Company increased its tax liability to $33,000 for unrecognized tax benefits from the $30,000 that was recorded on December 31, 2009.
Stock-based Compensation
The Company accounts for share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the income statement based on their fair values. Refer to Note 7 for further discussion of stock-based compensation recognized for periods presented.
Impairment of Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to discounted future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company does not believe that any of our long-lived assets, were impaired as of December 31, 2010 and 2009.
Recent Accounting Pronouncements
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), which is included in the ASC Topic 820 (Fair Value Measurements and Disclosures). ASU 2010-06 requires new disclosures on the amount and reason for transfers in and out of Level 1 and 2 fair value measurements. ASU 2010-06 also requires disclosure of activities, including purchases, sales, issuances and settlements within the Level 3 fair value measurements, and clarifies existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this standard did not have a material effect on the Company’s financial statements.
In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), which is included in the FASB Accounting Standards Codification (the “ASC”) Topic 855 (Subsequent Events). ASU 2010-09 clarifies that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued. ASU 2010-09 was effective upon the issuance of the final update and did not have a significant impact on the Company’s financial statements.
In June 2009, the FASB issued a standard which changes the way entities account for special purpose entities. This guidance changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
Foreign Currency Risk
Nearly all of the Company’s revenues are derived from transactions denominated in U.S. dollars. We purchase products in the normal course of business from foreign manufacturers. As such, we have exposure to adverse changes in exchange rates associated with those product purchases, but this exposure has not been significant.
Impact of Inflation
The Company believes the effects of inflation, if any, on our results of operations and financial condition have not been material in recent years.
Interest Rate Sensitivity
The Company had cash and cash equivalents totaling $0.7 million at December 31, 2010. The unrestricted cash and cash equivalents were held for working capital purposes. We do not enter into investments for trading or speculative purposes. We intend to maintain our portfolio of cash equivalents, including money market funds and certificates of deposit. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value as a result of changes in interest rates. As of December 31, 2010, all of our investments were held in money market funds.
The Company’s exposure to market risk also relates to the increase or decrease in the amount of interest expense we must pay on our outstanding debt instruments, primarily certain borrowings under our revolving credit facility and term note. The advances under this revolving credit facility and the term note bear a variable rate of interest determined as a function of the prime rate and the published LIBOR rate at the time of the borrowing. If interest rates were to increase by two percent, the additional interest expense as of December 31, 2010 would not be material since at December 31, 2010, there was no outstanding balance under our revolving credit facility. As of March 28, 2011, the Company’s exposure to market risk also relates to the increase or decrease in the amount of interest expense we must pay on our borrowings under newly issued term note. The advances under this term note bear a variable rate of interest determined as a function of the published LIBOR rate at the time of the borrowing.
Item 8.
Item 8.
Financial Statements and Supplementary Data.
The Company has elected as a smaller reporting company not to furnish certain quarterly financial data and other supplementary data.
DOVER SADDLERY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Dover Saddlery, Inc.
Littleton, Massachusetts
We have audited the accompanying consolidated balance sheets of Dover Saddlery, Inc. and subsidiaries (the “Company”) as of December 31, 2010, and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 Dover Saddlery, Inc. and subsidiaries as of December 31, 2010, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP.
Boston, Massachusetts
March 31, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Dover Saddlery, Inc.
Littleton, Massachusetts
We have audited the accompanying consolidated balance sheet of Dover Saddlery, Inc. and subsidiaries (the Company) as of December 31, 2009 and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dover Saddlery, Inc. and subsidiaries at December 31, 2009, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.
/s/ Caturano and Company, P.C.
Boston, Massachusetts
March 22, 2010
DOVER SADDLERY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes.
DOVER SADDLERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes.
DOVER SADDLERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
See accompanying notes.
DOVER SADDLERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes.
DOVER SADDLERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations and Organization
Dover Saddlery, Inc., a Delaware corporation (the “Company”), is a leading specialty retailer and the largest multi-channel marketer of equestrian products in the United States. The Company sells products through a multi-channel strategy, including direct and retail, with stores located in Massachusetts, New Hampshire, Delaware, Texas, Virginia, Maryland, New Jersey, Georgia and Rhode Island. The Company provides a complete line of products, as well as specially developed, private label offerings from its direct marketing headquarters, warehouse, and call center facility in Littleton, Massachusetts.
The accompanying consolidated financial statements comprise those of the Company and its wholly owned subsidiaries, Dover Saddlery, Inc., a Massachusetts corporation, Smith Brothers, Inc., a Texas corporation, Dover Saddlery Retail, Inc., a Massachusetts corporation, Old Dominion Enterprises, Inc., a Virginia corporation, and Dover Saddlery Direct, Inc., a Massachusetts corporation. All inter-company accounts and transactions have been eliminated in consolidation.
2. Summary of Significant Accounting Policies
The accompanying financial statements reflect the application of certain accounting policies described in this note and elsewhere in the accompanying notes to the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Segment Information
Operating segments are identified as components of an enterprise about which separate, discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment utilizing a multi-channel distribution strategy. Additionally, it is not practical for the Company to disclose product revenues by discrete product categories.
The following table presents certain selected operating data from both the direct and retail market channels (dollars in thousands):
Revenue Recognition
Revenues from merchandise sales, including shipping and handling, are recognized when payment is reasonably assured, the product is shipped and title and risk of loss have transferred to the customer. For direct sales, this occurs when product is delivered to the common carrier at the Company’s warehouse. For retail sales, this occurs at the point of sale. Revenues are recorded net of local sales tax collected. At the time of recognition, the Company provides a reserve for projected merchandise returns. The reserve, which is based on prior return experience, is recorded in accrued expenses and other current liabilities (see Note 9).
Shipping and Handling Costs
The Company has classified amounts billed to customers for shipping and handling as revenue, and shipping and handling costs as cost of revenues in the accompanying consolidated statements of operations.
Cost of Revenues and Selling, General and Administrative Expenses
The Company’s consolidated cost of revenues primarily consists of merchandise costs, purchasing, handling and transportation costs to obtain the merchandise and ship it to customers or its stores. The Company’s consolidated selling, general and administrative expenses primarily consist of selling and marketing expenses, including amortization of deferred catalog costs, retail occupancy cost, depreciation, amortization, and general and administrative expenses.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.
Property, Equipment and Depreciation
Property and equipment are recorded at cost. Expenditures for additions, renewals, and betterments of property are capitalized and depreciated over the estimated useful life. Expenditures for repairs and maintenance are charged to expense as incurred.
The Company provides for depreciation of assets recorded, including those under capitalized leases, using the straight-line method by charges to operations in amounts that allocate the cost of the assets over their estimated useful lives as follows:
Depreciation of property and equipment was recorded under capital leases were approximately $731,000 and $768,000 for the years ended December 31, 2010 and 2009, respectively.
Inventory
Inventory consists of prepaid, finished goods in the Company’s mail-order warehouse and retail stores. The Company’s inventories are stated at the lower of cost, with cost determined by the first-in, first-out method, or net realizable value. The Company maintains a reserve for excess and obsolete inventory. This reserve as of December 31, 2010 and 2009 was $95,000. The Company continuously monitors the salability of its inventories to ensure adequate valuation of the related merchandise.
Advertising
The Company recognizes deferred costs over the period of expected future revenue, which is less than one year. These costs are recognized over the period of expected future revenue, which is less than one year. Deferred costs as of December 31, 2010 and 2009 were approximately $930,000 and $1,164,000, respectively. The combined marketing and advertising costs charged to selling, general, and administrative expenses for the years ended December 31, 2010 and 2009, were approximately $7,426,000 and $8,172,000, respectively.
Accounting for Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company does not believe any of its long-lived assets have been impaired as of the periods presented.
Pre-opening Store Expenses
All non-capital costs associated with the opening of new retail stores are expensed as incurred.
Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, line of credit advances, and notes payable. The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximates fair value due to their short-term nature. The carrying value of the line of credit as of December 31, 2010, is not materially different from the fair value of the line of credit. The carrying value of the subordinated notes payable, as of December 31, 2010, is not materially different from the fair value of the notes.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash equivalents and accounts receivable. The Company places its cash and cash equivalents in highly rated financial institutions. The Company maintains cash and cash equivalent balances with financial institutions that occasionally exceed federally insured limits. The Company has not experienced any losses related to these balances, and management believes its credit risk to be minimal. In addition, accounts receivable consists primarily of customer credit card transactions that are fully authorized with payment in transit as of period end and, therefore, no allowance for doubtful accounts is deemed necessary. For the periods presented, there were no customers that comprised more than 10% of receivables or revenues.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Total comprehensive income (loss) for the years ended December 31, 2010 and 2009 equaled net income and was approximately $2,045,000 and $904,000, respectively.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax bases of assets and liabilities and net operating loss and credit carry forwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when it is more likely than not that some portion of the deferred tax assets will not be realized.
Net Income per Share
Basic net income per share is determined by dividing net income available to common stockholders by the weighted average common shares outstanding during the period. Diluted net income per share is determined by dividing net income by the dilutive weighted average common shares outstanding. The diluted weighted average common shares outstanding include the potential incremental common shares from the exercise of stock options and warrants using the treasury stock method, if dilutive.
A reconciliation of the number of shares used in the calculation of basic and diluted net income per share is as follows:
In 2010 and 2009, approximately 777,000 and 573,000 options and warrants to acquire common stock were excluded from the diluted weighted average shares calculation as the effect of such options and warrants was anti-dilutive.
Stock-based Compensation
The Company accounts for share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the statement of operations based on their fair values. Refer to Note 7 for further discussion of stock-based compensation recognized for periods presented.
Recent Accounting Pronouncements
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), which is included in the ASC Topic 820 (Fair Value Measurements and Disclosures). ASU 2010-06 requires new disclosures on the amount and reason for transfers in and out of Level 1 and 2 fair value measurements. ASU 2010-06 also requires disclosure of activities, including purchases, sales, issuances and settlements within the Level 3 fair value measurements, and clarifies existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this standard did not have a material effect on the Company’s financial statements.
In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), which is included in the FASB Accounting Standards Codification (the “ASC”) Topic 855 (Subsequent Events). ASU 2010-09 clarifies that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued. ASU 2010-09 was effective upon the issuance of the final update and did not have a significant impact on the Company’s financial statements.
In June 2009, the FASB issued a standard which changes the way entities account for special purpose entities. This guidance changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance.
3. Financing Agreements
Revolving Credit Facility
The $13,000,000 senior revolving credit facility in effect as of December 31, 2010, of which up to $1,000,000 could be in the form of letters of credit, bore interest at the base rate, announced from time to time by the bank, plus an applicable margin determined by the Company’s funded debt ratio. At December 31, 2010, the LIBOR rate (base rate) was 0.26%, plus the applicable margin of 1.95%. Interest was payable monthly. At its option, the Company may have had all or a portion of the unpaid principal under the credit facility bear interest at various LIBOR or prime rate options.
The Company was obligated to pay commitment fees of 0.25% per annum on the average daily, unused amount of the line of credit during the preceding quarter. All assets of the Company collateralize the senior revolving credit facility. Under the terms of the credit facility, the Company was subject to certain covenants including, among others, maximum funded debt ratios, operating cash flows, current asset ratios, and capital expenditures. At December 31, 2010, the Company was in compliance with all of the original covenants under the credit facility. The Company and the bank amended the senior revolving credit agreement on August 10, 2010 to extend the loan to February 2012. The loan was originally due in full in January 2011. The Company and the bank further amended the credit agreement in March 28, 2011, as discussed below.
Previously, on March 27, 2009, the Company amended its senior revolving credit facility with the bank to adjust various covenant levels for fiscal year 2009, due to the on-going impact of the economic recession. The maximum amount to be borrowed was reduced from $18,000,000 to $14,000,000 in 2009, through June 2010, and this was further reduced to $13,000,000 on June 30, 2010.
At December 31, 2010, the Company had the ability to borrow $13,000,000 on the revolving line of credit, subject to certain covenants, of which there was no outstanding balance, bearing interest at the net revolver rate of 2.21%. At December 31, 2009, the Company had the ability to borrow $14,000,000, of which $3,000,000 was outstanding, bearing interest at the net revolver rate of 3.18%.
On March 28, 2011, the Company and the bank further amended the credit agreement in connection with the refinancing of the $5,000,000 senior subordinated notes as described under Subsequent Events below.
Senior Subordinated Notes Payable and Warrants
In December 2007, the Company issued $5,000,000 in senior subordinated notes payable. The notes were subordinated in right of payment to existing and future senior debt, ranked equal in right of payment with any future senior subordinated debt and were senior in right of payment to any future subordinated debt. Interest accrued at an annual rate of 14%, of which 12% was payable quarterly in arrears. The remaining 2% per annum was deferrable, and if deferred, was compounded and due in full along with outstanding principal balance on December 11, 2012. As of December 31, 2010 and 2009, the Company had deferred approximately $398,000 and $250,000, respectively, of interest payments. Prepayment on the principal amount due under the notes may have been made voluntarily at any time, plus accrued and unpaid interest and a prepayment fee of 3% if paid after December 11, 2009, and 0% if paid after December 11, 2010.
In connection with the issuance of the subordinated notes, the Company issued warrants to the note holders, exercisable at any time after December 11, 2007, for an initial 118,170 shares of its common stock at an initial exercise price of $3.96. The number of shares to be received for the warrants, upon exercise, is subject to change in the event of additional equity issuances and/or stock splits. The warrants expire in December 2016. The warrants were estimated to have a fair value of $272,000, which has been reflected as a discount of the carrying value. The discount is amortized through interest expense over the life of the notes. The warrants were valued using a Black-Scholes calculation with a risk free interest rate of 4.3%, an expected life of 9 years (which reflects the contractual term), a volatility of 43.4% and a dividend yield of 0%. In September 2009, with the prior approval of the Board, the Company modified certain terms of the warrants and reduced the exercise price to $2.75 per share. A charge of $36,000 was recognized in conjunction with the warrant modification included in interest expense.
As of December 31, 2010, the net $5,293,000 subordinated notes, on the consolidated balance sheet, reflected the $5,000,000 face value, plus approximately $398,000 in deferred interest less the remaining unamortized net discount of approximately $104,000. As of December 31, 2009, the net $5,091,000 subordinated notes, on the consolidated balance sheet, reflected the $5,000,000 face value, plus approximately $250,000 in deferred interest less the remaining unamortized net discount of approximately $159,000.
Under the terms of the subordinated note agreements, the Company was subject to certain covenants, including, among others, maximum funded debt ratios, operating cash flows, current asset ratios and capital expenditures. At December 31, 2010, the Company was in compliance with all covenants.
On March 28, 2011, the Company refinanced the $5,000,000 senior subordinated notes with the bank as described below in Subsequent Events.
Debt Payments
The estimated aggregate principal payments under our combined financing agreements as of December 31, 2010 for each of the next five fiscal years are as follows (including the effect of the refinance discussed in Note 13. Subsequent Events):
4. Investment in Affiliate
Investments are accounted for using the equity method of accounting if the investment provides the Company the ability to exercise significant influence, but not control, over an investee, as generally deemed to exist if the Company has an ownership interest in the voting stock of the investee of between 20% and 50%. The Company records its investment in equity method investees meeting these characteristics as an asset, included in intangibles and other assets in the accompanying consolidated balance sheets.
Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company’s share of net earnings or loss of the affiliate as they occur, rather than as dividends or other distributions are received, limited to the extent of the Company’s investment in, advances to, and commitments for the investee.
On April 11, 2008, the Company acquired a significant non-controlling interest in Hobby Horse Clothing Company, Inc. (“HH”), in exchange for 81,720 shares of unregistered Dover common stock. The Company accounts for this investment using the equity method.
The Company acquired 40% of the common stock of HH, a privately owned company. The total acquisition costs included $380,000 in common stock, as well as $33,300 in professional fees. The valuation of the Company’s stock was set using an average closing price of the Company’s common stock over the days immediately preceding and including the acquisition date. Based on the purchase allocation, the total acquisition cost of $413,300 was allocated to the fair value of the Company’s share of net assets acquired, including approximately $138,000 of intangible assets, which represents the difference between the cost and underlying equity in HH’s net assets at the date of acquisition.
The Company’s equity share of HH’s net income, including the intangible asset customer list amortization (resulting from the purchase price allocation) is reflected as other investment (income) in the accompanying consolidated statements of income. In 2010, the investment income included a non-recurring gain of $402,000 recorded in June 2010 on its share of the proceeds from a life insurance settlement contract on a former officer of HH. The Company also received a cash dividend of $330,000 from HH during the quarter ended June 30, 2010, reducing the investment carrying value. The Company recorded a net gain of $272,000 for the year ending December 31, 2010. The resulting carrying value at December 31, 2010, was $277,000 and was included in intangibles and other assets, net in the accompanying consolidated balance sheets.
Under certain circumstances, the Company had the right to acquire the remaining 60% of the common stock of Hobby Horse, at fair value as defined, for a period beginning October 2010 through January 2011. The Company did not exercise its right to purchase the remaining 60%.
In May 2010, the Company launched a joint venture to provide equine pharmaceuticals to the equine marketplace. The venture, HorsePharm.com, LLC (“HP”), was established as a limited liability company, and Dover has a non-controlling interest of 50%. The Company accounts for this investment using the equity method. Thus, during the second quarter, Dover recorded its portion of the initial investment in HP of $60,000. For the third and fourth quarters of 2010 the Company recorded a net loss of $(19,846) for its share of the joint venture’s operating results. The carrying value at December 31, 2010, was $40,154, which is included in intangibles and other assets, net, in the accompanying consolidated balance sheets. The operating agreement governing HP contains a buy/sell feature that can be exercised after one year of launching HP for a price established by the HP member who initiates the buy/sell feature. The HP member that receives the offer can elect to buy the other member’s interest or sell its interest at the offered price.
5. Commitments
The Company leases its facilities and certain fixed assets that may be purchased for a nominal amount on the expiration of the leases under non-cancelable operating and capital leases that extend through 2019. These leases, which may be renewed for periods ranging from one to five years, include fixed rental agreements as well as agreements with rent escalation clauses.
Property and equipment includes the following cost and related accumulated depreciation associated with equipment under capital lease:
Future minimum commitments for operating and capital lease obligations as of December 31, 2010 are as follows:
Total rental expense under the operating agreements included in the accompanying consolidated statements of income for December 31, 2010 and 2009 was $2,360,000 and $2,320,000, respectively.
In connection with retail locations, the Company enters into various operating lease agreements, with escalating rental payments. The effects of variable rent disbursements have been expensed on a straight-line basis over the life of the lease. As of December 31, 2010 and 2009, there was approximately $479,000 and $348,000, respectively, of deferred rent recorded in other current liabilities.
6. Income Taxes
A deferred tax asset or liability is recorded based on the differences between the financial reporting and tax bases of assets and liabilities and is measured by the enacted tax rates expected to be in effect when these differences reverse. The deferred income tax provision results from the net change during the year of deferred income tax assets and liabilities. The income tax provision is as follows:
Deferred income taxes relate to the following temporary differences as of:
The effective income tax rate varies from the amount computed using the statutory U.S. income tax rate as follows:
The Company has reviewed its tax positions to determine whether the positions are more likely than not to be sustained upon examination by regulatory authorities. If a tax position meets the more-likely-than-not standard, then the related tax benefit is measured based on a cumulative probability analysis of the amount that is more-likely-than-not to be realized upon ultimate settlement or disposition of the underlying issue. At December 31, 2010 the Company increased its tax liability to $33,000 for unrecognized tax benefits from the $30,000 that was recorded on December 31, 2009. Although the Company believes it has adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.
The Company records interest and penalties related to income taxes as a component of income tax. The Company did not recognize any interest and penalty expense for the years ended December 31, 2010 or 2009.
Tax years 2006 through 2010 remain subject to examination by the IRS, and 2007 through 2010 tax years remain subject to examination by Massachusetts, and 2006 through 2010 by various other jurisdictions.
7. Stockholders’ Equity
Preferred Stock
The Company currently has authorized 1,000,000 shares of Preferred Stock, none of which were issued or outstanding at December 31, 2010 or 2009.
Stock Option Plans
In August 2005, our Board of Directors approved the 2005 Equity Incentive Plan, which became effective on November 17, 2005, concurrent with our public offering. The 2005 Equity Incentive Plan provides for the grant of incentive stock options to employees and non-qualified stock options, awards of common stock and opportunities to make direct purchases of common and other stock to our employees and directors.
The aggregate number of shares of our common stock that may be issued under the 2005 Equity Incentive Plan is 1,123,574. The aggregate number of shares of common stock that may be granted in any calendar year to any one person pursuant to the 2005 Equity Incentive Plan may not exceed 50% of the aggregate number shares of our common stock that may be issued pursuant to the 2005 Equity Incentive Plan.
The 2005 Equity Incentive Plan is administered by the Compensation Committee of our Board of Directors, which has been granted the discretion to determine when awards are made, which directors or employees receive awards, whether an award will be in the form of an incentive stock option, a nonqualified stock option or restricted stock, the number of shares subject to each award, vesting, and acceleration of vesting. Generally, options granted to employees under the 2005 Equity Incentive Plan are expected to vest over a five-year period from the date of grant.
Stock options issued under the 2005 Equity Incentive Plan generally expire within ten years or, in the case of incentive stock options issued to 10% or greater shareholders, within five years.
Prior to the adoption of the 2005 Plan, the Company had issued 513,981 options under the 1999 Plan, which was the maximum the plan permitted. Under the 2005 Plan, the Company has reserved a total of 1,123,574 shares of common stock for issuance under the Plan. As of December 31, 2010, there were 311,229 shares available for future grants, and as of December 31, 2009, 9,945 shares were available for future grants.
The following table summarizes all stock option activities.
The following table sets forth the intrinsic value at December 31, 2010 and 2009, for outstanding and exercisable options:
Stock-based Compensation
The Company utilizes, in most cases, the Binomial Lattice option pricing model to determine the fair value of stock-based compensation. The Binomial Lattice model requires the Company to make subjective assumptions regarding the volatility of the underlying stock. The estimated volatility of the Company’s common stock price is based on the median of the fluctuations in the historical price of the Company’s common stock. The Binomial Lattice model also requires a risk-free interest rate, which is based on the U.S. Treasury yield curve in effect at the time of the grant, and the dividend yield on the Company’s common stock, which is assumed to be zero since the Company does not pay dividends and has no current plans to do so in the future. Changes in these assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related expense recognized on the consolidated statement of operations.
In November 2010 and November 2009, the Company granted 204,675 and 10,500 options to the Company employees and director, respectively. Using the Binomial Lattice Model (with assumptions disclosed below), the 2010 and 2009 awards had weighted average fair value of $1.79 and $1.66 per option, respectively. The stock option expenses recorded were $190,000 and $179,000, net of estimated forfeitures, for the years ended December 31, 2010 and 2009, respectively. The fair value of these awards is recorded as stock-based compensation expense included in general and administrative expense over the vesting period. The remaining unrecognized stock-based compensation expense related to unvested awards at December 31, 2010, was approximately $622,000 to be recognized on a straight-line basis over the employee’s weighted average vesting period of 3.6 years.
The following table illustrates the assumptions used in the Binomial-Lattice calculation used to value to the option awards recognized in the 2010 and 2009 Statements of Operations:
8. Employee Savings Plan
The Company maintains the Dover Saddlery, Inc. 401k Profit Sharing Plan (the 401k Plan). Employees of the Company may participate in the 401k Plan after three months of service, which allows employees to defer a percentage of their salary under Section 401k of the Internal Revenue Code. The 401k Plan also allows for the Company to make discretionary contributions determined annually based on a percentage of the employee’s compensation. No employer contributions were made during the periods presented.
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
10. Intangibles and Other Assets
Intangibles and other assets consist of the following:
Deferred financing costs are amortized on a straight-line basis over the shorter of the contractual or estimated life of the related debt. In connection with the August 2010 debt refinancing discussed in Note 3, the Company recognized a portion of unamortized deferred financing costs associated with the modification of facilities. Purchased catalog and related assets are amortized on a straight-line basis over the estimated useful lives of the underlying assets, extending through 2012. Amortization expense for the Company’s catalog and related assets for the years ended December 31, 2010 and 2009 was approximately $6,000 and $6,000, respectively.
The estimated aggregate of purchased catalog and deferred financing costs for each of the next five years is as follows:
11. Related Party Transactions
On October 26, 2007, the disinterested members of the Audit Committee of the Board of Directors approved a $5,000,000 subordinated debt financing facility as part of a plan to refinance the Company’s former subordinated debt with Patriot Capital. The new sub-debt facility was led by BCA Mezzanine Fund, L.P., which participated at $2,000,000 (in which Company Board director Gregory Mulligan holds a management position and indirect economic interest). The current subordinated notes were issued as of December 11, 2007. Except as noted above with respect to Mr. Mulligan, there is no relationship, arrangement or understanding between the Company and any of the subordinated note holders or any of their affiliates, other than in respect of the note agreement establishing and setting forth the terms and conditions of this mezzanine loan agreement. For the three and twelve months ended December 31, 2010 and 2009, the Company recognized $175,000 in each period in interest expense for the subordinated notes payable, of which $25,000 was accrued in each period as deferred interest, payable upon maturity. In September 2009, the Company modified certain terms of the warrants and reduced the exercise price to $2.75 per share. A charge of $36,000 was recognized in conjunction with the warrant modification. These warrant modifications were determined to be in the best interests of the Company, following review by the Audit Committee and approval of the Board of Directors, with Mr. Mulligan abstaining in both cases. (See note 13 for discussion of subsequent refinancing).
In October of 2004, the Company entered into a lease agreement with a minority stockholder. The agreement, which relates to the Plaistow, NH retail store, is a five-year lease with options to extend for an additional fifteen years. For the year ended December 31, 2010 the Company expensed approximately $205,000 in connection with the lease. For the year ended December 31, 2009, the Company expensed approximately $196,000 in connection with the lease. In addition, a related deposit of $18,750 is recorded as prepaid expenses and other current assets as of December 31, 2010 and December 31, 2009.
In order to expedite the efficient build-out of leasehold improvements in its new retail stores, the Company utilizes the services of a real estate development company owned by a non-executive Company employee and minority stockholder to source construction services and retail fixtures. Total payments for the year ended December 31, 2010, consisting primarily of reimbursements for materials and outside labor, for the fit-up of one store were approximately $117,000. Reimbursements for the year ended December 31, 2009 were approximately $104,000.
12. Contingencies
From time to time, the Company is exposed to litigation relating to our products and operations. The Company is not currently engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material, adverse affect on our financial condition or results of operations.
13. Subsequent Events
On March 28, 2011, the Company and the bank amended the credit agreement in connection with the refinancing of the $5,000,000 senior subordinated notes. Under the amended revolving line of credit, the Company can borrow up to $13,000,000, of which up to $1,000,000 can be in the form of letters of credit, and increase this amount up to $20,000,000 at the discretion of the bank. Any outstanding balances borrowed under the credit facility are due April 30, 2013. The credit facility bears interest at the base rate, announced from time to time by the bank, plus an applicable margin determined by the Company’s funded debt ratio. As of March 28, 2011, the LIBOR rate (base rate) was 0.26%, plus the applicable margin of 2.20%. Interest is payable monthly. At its option, the Company may have all or a portion of the unpaid principal under the credit facility bear interest at various LIBOR or prime rate options.
The Company is obligated to pay commitment fees of 0.20% per annum on the average daily, unused amount of the line of credit during the preceding quarter. All assets of the Company collateralize the senior revolving credit facility. Under the terms of the credit facility, the Company is subject to certain covenants including, among others, maximum funded debt ratios, maximum debt to tangible net worth ratios, minimum fixed charge ratios, current asset ratios, and capital expenditures.
On March 28, 2011, the Company borrowed $5,500,000 in the form of a 7-year term note from the bank to refinance the $5,000,000 senior subordinated notes and deferred interest on those notes. The term note bears fixed interest currently estimated at 7.2% on $3,900,000 of the principal and floating interest on the remaining $1,600,000 of the principal based on a base rate, with a minimum of 1.0% and announced from time to time by the bank, plus an a 4.4% margin. The Company shall purchase interest rate swaps in order to effectively fix the interest rate at approximately 7.2%. As of March 28, 2011, the LIBOR rate (base rate) was 0.26%. Interest is payable monthly. The Company is obligated to repay $786,000 of principal annually commencing in April 2013 and extending to March 2018. The Company is further obligated to accelerate repayment of up to $1,600,000 in principal in the event it has excess cash flow determined by a cash flow recapture formula. All assets of the Company collateralize the term note facility. Under the terms of the term note facility, the Company is subject to certain covenants including, among others, maximum funded debt ratios, maximum debt to tangible net worth ratios, minimum fixed charge ratios, current asset ratios, and capital expenditures. The Company expects to realize significant interest savings as a result of refinancing the senior subordinated notes.
The Company has evaluated all events or transactions through the date of this filing. During this period, the Company did not have any additional material subsequent events that impacted its consolidated financial statements.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.
Not applicable.
Item 9A.
Item 9A.
Controls and Procedures.
The Company’s management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2010. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and that as of December 31, 2010, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective appropriate as of December 31, 2010, in management’s judgment with similar cost-benefit considerations, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Management reviewed the results of its assessment with our Audit Committee. No change in our internal control over financial reporting occurred during the fiscal quarter ended December 31, 2010, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company, as a smaller reporting company, to provide only management’s report in this Annual Report.
On March 28, 2011, the Company and the bank amended the credit agreement in connection with the refinancing of the $5,000,000 senior subordinated notes. Under the amended revolving line of credit, the Company can borrow up to $13,000,000, of which up to $1,000,000 can be in the form of letters of credit, and increase this amount up to $20,000,000 at the discretion of the bank. Any outstanding balances borrowed under the credit facility are due April 30, 2013. The credit facility bears interest at the base rate, announced from time to time by the bank, plus an applicable margin determined by the Company’s funded debt ratio. As of March 28, 2011, the LIBOR rate (base rate) was 0.26%, plus the applicable margin of 2.20%. Interest is payable monthly. At its option, the Company may have all or a portion of the unpaid principal under the credit facility bear interest at various LIBOR or prime rate options.
The Company is obligated to pay commitment fees of 0.20% per annum on the average daily, unused amount of the line of credit during the preceding quarter. All assets of the Company collateralize the senior revolving credit facility. Under the terms of the credit facility, the Company is subject to certain covenants including, among others, maximum funded debt ratios, maximum debt to tangible net worth ratios, minimum fixed charge ratios, current asset ratios, and capital expenditures.
On March 28, 2011, the Company borrowed $5,500,000 in the form of a 7-year term note from the bank to refinance the $5,000,000 senior subordinated notes and deferred interest on those notes. The term note bears fixed interest currently estimated at 7.2% on $3,900,000 of the principal and floating interest on the remaining $1,600,000 of the principal based on a base rate, with a minimum of 1.0% and announced from time to time by the bank, plus an a 4.4% margin. The Company shall purchase interest rate swaps in order to effectively fix the interest rate at approximately 7.2%. As of March 28, 2011, the LIBOR rate (base rate) was 0.26%. Interest is payable monthly. The Company is obligated to repay $786,000 of principal annually commencing in April 2013 and extending to March 2018. The Company is further obligated to accelerate repayment of up to $1,600,000 in principal in the event it has excess cash flow determined by a cash flow recapture formula. All assets of the Company collateralize the term note facility. Under the terms of the term note facility, the Company is subject to certain covenants including, among others, maximum funded debt ratios, maximum debt to tangible net worth ratios, minimum fixed charge ratios, current asset ratios, and capital expenditures. The Company expects to realize significant interest savings as a result of refinancing the senior subordinated notes.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
The information set forth under the captions “Directors, Executive Officers” and “Corporate Governance”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Ethics” appearing in our definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on May 5, 2011, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2010, is incorporated herein by reference.
The information set forth under the caption “Remuneration of Executive Officers and Directors” appearing in our definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on May 5, 2011, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2010, is incorporated herein by reference.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information set forth under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plans” appearing in our definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on May 5, 2011, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2010, is incorporated herein by reference.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information set forth under the captions “Certain Relationships and Related Transactions” and “Director Independence”, appearing in our definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on May 5, 2011, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2010, is incorporated herein by reference.
Item 14.
Item 14.
Principal Accounting Fees and Services.
The information set forth under the captions “Principal Accounting Fees and Services” appearing in our definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on May 5, 2011, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2010, is incorporated herein by reference.
Part IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this Annual Report on Form 10-K are as follows:
1. Financial Statements:
See listing of financial statements included as part of this Form 10-K in Item 8 of Part II.
2. Financial Statement Schedules:
The information required by this Item has been included in the Financial Statements and related notes as part of this Form 10-K in Item 8 of Part II above.
3. Exhibits:
Exhibit List
Set forth below is list of exhibits submitted with this Form 10-K as filed or furnished with the SEC:
See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K for a complete index of exhibits, including those submitted with this Form 10-K as filed or furnished, together with those filed or furnished with the SEC incorporated by reference to other filings.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Exhibit Index
*
Filed herewith.

Furnished herewith.

Indicates a management contract or compensatory plan or arrangement