Quarterly Report

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Quarter Ended September 30, 2006

OR

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-51624

DOVER SADDLERY, Inc.

(Exact name of registrant as specified in its charter)

DELAWARE (State of other jurisdiction of incorporation or organization)		04-3438294 (I.R.S. Employer Identification No.)

525 Great Road, Littleton, MA 01460
(Address of principal executive offices)

(978) 952-8062 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

YES þ       NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Accelerated filer o     Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

     Shares outstanding of the registrant’s common stock (par value $0.0001) at November 9, 2006: 5,074,344

 

 

DOVER SADDLERY, INC. AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2006

		Page
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at September 30, 2006 and December 31, 2005			3
Condensed Consolidated Statements of Income for the three months ended September 30, 2006 and September 30, 2005 and the nine months ended September 30, 2006 and September 30, 2005			4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and September 30, 2005			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Use of Proceeds from Registered Securities
Item 5. Other Information
Item 6. Exhibits
SIGNATURES
EX-10.47 First Amendment and Extension to Lease Agreement dated September 2006 between C. E. Hoffman Limited Partnership and Dovery Saddlery, Inc.
EX-31.1 PEO Certification Rule 13a-14(a) or Rule 15d-14(a)
EX-31.2 PFO Certification Rule 13a-14(a) or Rule 15d-14(a)
EX-32.1 CEO and CFO Certification section 1350

PART I—FINANCIAL INFORMATION

See accompanying notes.

See accompanying notes.

DOVER SADDLERY, INC. AND SUBSIDIARIES

      C. Accounting for stock-based compensation:

          Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share Based Payment (“SFAS 123R”). SFAS 123R supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock issued to Employees (“APB”), for periods beginning in fiscal 2006. Under APB 25, the Company accounted for stock options under the intrinsic value method. Accordingly, the Company recognized $104,192 of compensation expense related to employee stock options during the nine months ended September 30, 2005 because the exercise price of such options was less than the fair value of the underlying stock on the grant date. The Company previously disclosed the fair value of its stock options under the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (“SFAS 123”).

          Accordingly, the proforma information for the three and nine months ended September 30, 2005 was as follows (in thousands):

The above pro-forma expense was determined under the Black-Scholes calculation using assumptions consistent with those disclosed as of December 31, 2005.

The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s condensed consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. The adoption of SFAS 123R had no effect on the results of operations for the nine months ended September 30, 2006 as there were no outstanding unvested options as of December 31, 2005. In addition, there have been no options awarded in the first nine months of 2006.

On October 26, 2006, the Board of Directors approved the grant of 155,529 options, subject to certain restrictions. The options granted have an exercise price equal to the closing price of the common stock as reported on NASDAQ on the date of grant, vest over five years, and expire ten years after grant date subject to earlier termination in the event of employment termination and for incentive stock options granted to 10% holders, which expire five years after the grant date. Related future stock-based compensation expense will be reflected in the consolidated financial statements beginning in the fourth quarter of 2006.

      D. Inventory:

               Inventory consists of 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 was $70,000 as of September 30, 2006 and December 31, 2005. The Company continuously monitors the salability to ensure adequate valuation of the related merchandise.

      E. Advertising:

          The costs of direct-response advertising materials, primarily catalog production and distribution costs, are deferred in accordance with Statement of Position (SOP) 93-7, Reporting on Advertising Costs. These costs are recognized over the period of expected future revenue, which is less than one year. Deferred costs as of September 30, 2006 and December 31, 2005 were $2.4 million and $1.6 million respectively. The combined marketing and advertising costs charged to selling, general, and administrative expenses for the nine months ended September 30, 2006 and 2005 were approximately $6.8 million and $5.7 million respectively.

      F. Comprehensive Income:

SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. 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. Other than reported net income, the only other item of comprehensive income is the effectively hedged interest rate swap adjustment.

      G. Earnings per share:

          A reconciliation of the number of shares used in the calculation of basic and diluted net income per share is as follows (in thousands):

          A reconciliation of the net income available to common stockholders used in the calculation of basic and diluted net income per share is as follows (in thousands):

      H. Debt:

Revolving Credit Facility

          The $16,000,000 revolving credit facility, of which up to $2,000,000 can be in the form of letters of credit, shall bear 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 September 30, 2006 and December 31, 2005, the bank rates were 8.25%. The applicable margins were 0.00% and 1.00%, respectively. Interest is payable quarterly on the last business day of each fiscal quarter. As of September 30, 2006 and December 31, 2005, $1,600,000 and $0, respectively, bore interest at the base rate plus margin.

          At its option, the Company may have all or a portion of the unpaid principal under the credit facility bear interest at a one, two, three, or six month LIBOR rate options. The LIBOR rate was 5.33% and 4.38% at September 30, 2006 and December 31, 2005 respectively, plus an applicable margin determined by the Company’s funded debt ratio. The margins were 1.75% and 3.25% at September 30, 2006 and December 31, 2005 respectively, and were fixed for the LIBOR rate option period. Interest related to LIBOR rate options are payable at the maturity of the LIBOR agreements. As of September 30, 2006 and December 31, 2005, $5,000,000 bore interest at the one month LIBOR rate option.

          The Company is 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 on the revolving credit facility. All assets of the Company collateralize the revolving credit facility. Under the terms of the credit facility, the Company is subject to certain covenants including, among others, maximum funded debt ratios, operating cash flows, profitability, and capital expenditures. At September 30, 2006, the Company was in compliance with all covenants. The revolving line of credit is due in full in September 2008.

          At September 30, 2006 and December 31, 2005, the Company had the ability to borrow $16,000,000 on the revolving line of credit, of which $6,600,000 was outstanding on September 30, 2006 and $5,000,000 was outstanding on December 31, 2005.

Subordinated Notes Payable

          In September 2005, the Company issued $8.05 million of senior subordinated debt whereby the additional funds were used to pay off the previous subordinated note payable. The note bears interest at the rate of 11.5% payable monthly. The note may be prepaid at the Company’s option at 104% or 105% of its principal amount until September 16, 2007 or 2008, respectively. The note is payable at 106% of its principal amount by September 16, 2009.

          Under the terms of the credit facility, the Company is subject to certain covenants including, among others, maximum funded debt ratios, operating cash flows, profitability, and capital expenditures. At September 30, 2006 the Company was in compliance with all covenants. The remaining balance was $3,000,000 at September 30, 2006 and December 31, 2005.

      I. Income Taxes

          The effective tax rates recorded for the year to date periods ended September 30, 2006 and 2005 were recorded based upon management’s best estimate of the effective tax rates for the entire respective years. The change in the effective tax rate from 48% for the first nine months of 2005 to 39% for the same period in 2006 is due to the reduction of certain income tax liabilities no longer deemed necessary, as well as non-deductible stock based compensation in 2005.

      J. Related Party Transactions

          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, 2005 the Company paid and expensed $160,000 in connection with the lease. For the nine months ended September 30, 2006 the Company paid and expensed $ 138,000. In addition, a related deposit of $18,750 is recorded as prepaid expenses and other current assets.

          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 nine months ended September 30, 2006, consisting primarily of reimbursements for materials and outside labor, for the fit-up of five stores were $283,000. Reimbursements in the prior fiscal year were $91,000.

      K. Commitments and contingencies:

Lease commitments

          The Company leases its facilities, as well as 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 2009. The facility 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.

          In connection with retail locations, the Company enters into various operating lease agreements, which will further escalate rental payments in the future. The effects of variable rent disbursements have been expensed on a straight-line basis over the life of the lease in accordance with SFAS No. 13 “Accounting for Leases”. As of September 30, 2006 and December 31, 2005 there was approximately $63,000 and $46,000 of deferred rent recorded in other current liabilities.

   Contingencies

          In February 2006, following the close of its 2005 fiscal year, the Company received an invoice for $2.1 million from Goldsmith, Agio, Helms & Linner LLC (GAH) seeking a success fee for financial advisory services purportedly due in connection with the Company’s initial public offering (IPO). In a cover letter accompanying its invoice, GAH asserted that if its invoice was not paid, GAH would pursue its claim in arbitration (herein, the “GAH Claim”).

          The Company has communicated emphatically to GAH that GAH did not have a valid claim for a success fee or other compensation in connection with the Company’s IPO. Nonetheless, on March 24, 2006, GAH filed a demand for arbitration with the American Arbitration Association for $2.1 million (plus interest and fees).

          The Company denies any and all liability for the GAH claim; plans to vigorously defend against such claim; and has filed a $3.0 million counterclaim against GAH for consequential and enhanced damages (plus costs and legal fees) that we suffered as the result of GAH’s breach of contract and of duties to us. Thus, no amounts have been accrued as of September 30, 2006 and December 31, 2005.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q, 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 future financial targets or trends 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 or achievements discussed in or implied by the forward-looking statements. Factors that could cause such a difference detailed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December31, 2005 (“fiscal 2005”). We disclaim any intent or obligation to update any forward-looking statements

Overview

          We are a leading specialty retailer and the largest direct marketer of equestrian products in the U.S. For over 20 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, including catalogs, the Internet and retail stores. This multi-channel strategy has allowed us to use catalogs and our proprietary database of nearly 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.

          We are committed to expanding our retail store channel. On June 29, 2006, we acquired Dominion Saddlery, the largest equestrian retailer in the Virginia and Maryland market, which operates four stores. This strategic acquisition provides access to critical leased locations and established customer relationships, as well as the elimination of a significant retail competitor. Since the acquisition, and for the next four months, we will be converting, expanding, and launching these stores as Dover Saddlery stores, giving us the premier position in one of the most important regional markets in the country. On September 29, 2006, we successfully opened our newest Dover store in Hunt Valley, Maryland.

     The following table presents certain selected operating data on an unaudited basis:

Comparison of Third Quarter Fiscal 2006 to Third Quarter Fiscal 2005

   Revenues

          Our total revenues increased 23.2% to $17.2 million in the third quarter of 2006, from $14.0 million in 2005, a total increase of $3.2 million. Revenues in our direct sales channel increased $1.9 million, or 16.0%, and revenues in our retail store channel increased $1.4 million, or 57.9%. The increase in revenues from our direct sales channel was attributed to higher unit volumes through both the catalog and the internet channels, and from both the Dover Saddlery and the Smith Brothers brands. The increase in revenues from our retail sales channel was due primarily to the acquisition of the Dominion stores.

Gross Profit

          Gross profit increased 19.5% to $6.3 million in the third quarter of 2006, from $5.3 million in the prior year Q3. Gross profit as a percentage of revenues decreased to 36.6% in 2006, from 37.8% of revenues in 2005. The increase of $1.0 million in gross profit was due to increased revenues in both our direct and retail sales channels. The decrease in gross profit as a percentage of revenues was attributable to variations in overall product mix, as well as increased freight costs.

Selling, General and Administrative

          Selling, general and administrative expenses increased to $5.8 million (33.4% of revenues) in the third quarter of 2006, from $4.6 million (33.2% of revenues) in 2005. The $1.2 million increase includes $0.4 million in marketing costs, primarily catalog expense, internet advertising and new store support designed to drive increased revenues. Labor and related costs increased approximately $0.1 million due to retail expansion. New public company costs, consisting of legal, audit, and insurance fees increased by $0.3 over the third quarter of 2005. Facility costs for new retail store space increased $0.1 million in the third quarter of 2006.

Interest Expense

          Interest expense, including amortization of deferred financing costs attributed to our subordinated debt and revolving credit facility, decreased 47% to $0.3 million in the third quarter of 2006, compared to $0.5 million in 2005. Our debt levels were reduced substantially as the result of the interim application of the Company’s proceeds from the IPO, resulting in decreased interest expense for both senior and remaining subordinated debt.

Income Tax Provision

          The provision for income taxes was $0.1 million in the third quarter of 2006, reflecting an effective tax rate of 33%, as compared to $0.1 million in 2005, reflecting an effective tax rate of 48%. The effective tax rates for the year to date periods were recorded based upon management’s best estimates of the rates for the entire respected years, and adjusted each quarter. The lower effective rate in 2006 versus 2005 is attributable to the reduction of certain income tax liabilities no longer deemed necessary.

Net Income

          Net income for the third quarter was $198,000, an increase of $115,000 over the $83,000 net income achieved in the third quarter of 2005. This increase is due primarily to increased revenues and reduced interest costs. Resulting earnings per share, fully diluted, increased to $.04 from the prior year of $.02.

Comparison of the Nine Months Ended September 30, 2006 to the Nine Months Ended September 30, 2005

   Revenues

     Our total revenues increased 16.8% to $52.0 million in the nine months ended in 2006, from $44.5 million in 2005, a total increase of $7.5 million. Revenues in our direct sales channel increased $5.4 million, or 14.2%, and revenues in our retail store channel increased $2.1 million, or 31.3%. The increase in revenues from our direct sales channel was attributed to higher unit volumes through both catalog and the Internet, and from both the Dover Saddlery and the Smith Brothers brands. Increases in our retail revenues were due primarily to the Dominon acquisition and Plaistow.

Gross Profit

     Gross profit increased 14.7% to $18.8 million for the nine months ended in 2006, from $16.4 million in 2005. Gross profit as a percentage of revenues decreased slightly to 36.1% for the nine months ended in 2006, from 36.7% of revenues in 2005. The increase of $2.4 million in gross profit was due to increased revenues, primarily in both our retail and direct sales channels. The slight decrease in gross profit as a percentage of revenues was attributable to variations in both overall product mix and the sales mix of our catalogs, as well as increased freight costs.

Selling, General and Administrative

     Selling, general and administrative expenses increased to $16.7 million (32.0% of revenues) for the nine months ended in 2006, from $13.9 million (31.1% of revenues) in 2005. The $2.8 million increase includes $1.1 million in marketing costs, primarily catalog expense, internet advertising and new store support designed to drive increased revenues. Labor and related costs increased approximately $0.3 million to support the new retail stores, increased direct channel sales and increased merchandising support functions. New public company costs, consisting of legal, audit, and insurance fees increased by $0.8 over the nine months ended in 2005.

Interest Expense

     Interest expense, including amortization of deferred financing costs attributed to our subordinated debt and revolving credit facility, decreased 44% to $0.7 million for the nine months ended in 2006, compared to $1.3 million in 2005. Our debt levels were reduced substantially as the result of the interim application of the company proceeds from the IPO, resulting in decreased interest expense for both senior and remaining subordinated debt.

Income Tax Provision

     The provision for income taxes was $0.6 million for the nine months ended in 2006, reflecting an effective tax rate of 39%, as compared to $0.6 million in 2005, reflecting an effective tax rate of 48%. The lower effective rate in 2006 versus 2005 is due to the reduction of certain income tax liabilities no longer deemed necessary.

Net Income

     Net income for the nine months ended in 2006 was $841,000, an increase of 32%, or $206,000 over the $635,000 net income achieved in 2005. This increase is due to the substantial growth in our direct and retail revenues, our investment in marketing, and reduced stock based compensation and interest costs, all partially offset by increased freight costs, as well as costs of being a public company. Our 2006 earnings per share, fully diluted, increased to $.16 from the prior year of $.14.

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 has generated additional demand for our normal equestrian product lines in the fourth quarter of the year. 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 such expenses as 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

In 2005, we generated net proceeds of $12.4 million through our initial public offering, which enhanced our other primary sources of liquidity which are cash flows generated from our operations and availability under our revolving credit facility. In addition to the $2.8 million of remaining cash at December 31, 2005 and the additional credit availability resulting from the application of proceeds from the offering to the outstanding balances under our revolving credit facility, we intend to use the primary sources of liquidity to fund new retail store locations, our working capital requirements, capital expenditure requirements and third-party debt service requirements. We may in the future need to obtain additional financing from banks, or through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements.

   Operating Activities

     The cash utilized in our operating activities in the nine months ended in 2006 was $1.8 million, with cash flow consisting primarily of net income and non-cash expenses totaling $1.3 million, increased by accounts payable of $1.3 million and offset by credit card receivables in transit of $0.6, increases in prepaid catalog expenses of $0.8 million, reductions of accrued expenses and gift certificates of $0.9 million, and inventory increases of $2.2 million attributable to retail growth. In the nine months ended in 2005, cash utilized by our seasonal operating activities was primarily due to net income and non-cash expenses of $1.4 million, which were offset by increases in prepaid expenses of $1.6 million, credit card receivables of $0.8 million, and inventory of $1.0 million, due to the opening of the new Plaistow, NH store.

   Investing Activities

     Cash used in our investing activities was $2.5 million in the nine months ended in 2006 and $0.5 million in the nine months ended in 2005. The Dominion acquisition was $1.5 million in 2006. Additional investment activities throughout these periods represent the purchase of capital equipment in support of our growth, including leasehold improvements, computer equipment, internal use software, furniture and fixtures, and the purchase of other assets and related deposits. Increases in investment activities can be expected in the balance of 2006 and in future years to fit out planned new retail stores with leasehold improvements, computer equipment, fixtures, furniture and other assets.

   Financing Activities

     Net cash provided by our financing activities was $1.5 million in the nine months ended in 2006, and $2.7 million was provided in the nine months ended in 2005. In the nine months ended in 2006, we funded our seasonal operating activities and investing activities with the remaining cash made available from the Company’s portion of our offering, as well as net borrowings under our revolving credit facility. The proceeds of our offering remain available through our ability to draw on our senior credit facility. In the nine months ended in 2005, net cash provided by our financing activities of $2.7 million consisted primarily of net borrowings under our revolving credit facility.

   Revolving Credit Facility

     In September 2005, we renewed and increased our revolving credit facility with Bank of America, N.A., under which we can borrow up to $16.0 million, including $2.0 million for letters of credit. We amended that facility on March 30, 2006 to adjust various covenants. Interest accrues at a variable rate based on both prime and published LIBOR rates. The credit facility expires on September 16, 2008 at which time all advances will be immediately due and payable. As of September 30, 2006, the revolving credit facility borrowing limit was $16.0 million and the amount outstanding under the credit facility was $6.6 million at a blended rate of 6.0% and the unused amount available was $9.4 million. We maintain a derivative financial instrument to hedge the risk of interest rate fluctuations on a portion of our outstanding bank debt. Borrowings are secured by substantially all of our assets. Under the terms of our credit facility, we are subject to certain covenants including, among others, maximum funded debt ratios and capital expenditures, minimum operating cash flows and profitability, and certain acquisition related activity. At September 30, 2006, we were in compliance with all covenants under the credit facility. If a default ever occurs, the bank may require that we repay all amounts then outstanding. Any amounts which we may be required to repay prior to a scheduled repayment date, however, would reduce funds that we could otherwise allocate to other opportunities that we consider desirable.

   Senior Subordinated Note and Warrant

     On September 16, 2005, we closed an Amended and Restated Senior Subordinated Note and Warrant Purchase Agreement with Patriot Capital Funding, Inc., which provided for our issuance of a senior subordinated note payable, which is due in full on September 16, 2009 for aggregate proceeds of $8.05 million. Of such proceeds, $3.5 million was used to pay off a previously existing subordinated note payable and $4.0 million was used to pay a portion of a $6.0 million purchase price of 795,865 shares of our common stock. The note is a general senior subordinated obligation, is subordinated in right of payment to our existing and future senior debt, ranks equal in right of payment with any of our future senior subordinated debt and is senior in right of payment to any of our future subordinated debt. Interest at an annual rate of 11.5% is payable monthly on the fifth business day of the month. Prepayment on the principal amount due under the note may voluntarily be made at any time in multiples of $100,000, plus accrued and unpaid interest and a prepayment fee equal to the principal amount prepaid multiplied by 4.0% if prepayment is made prior to September 16, 2007, 5.0% if prepayment is made prior to September 16, 2008 and 6.0% if prepayment is made prior to September 16, 2009. Mandatory prepayment is required upon a change in control. Simultaneously with the issuance of this note, we issued a warrant to Patriot Capital Funding, Inc. exercisable at any time after March 31, 2006 for up to 30,974 shares of our common stock at an exercise price of $0.00759 per share. In December 2005, we utilized proceeds from our public offering to prepay $5.1 million of the debt

due under the note, leaving a balance of $3,000,000. As of September 30, 2006 the balance of the Subordinated Note was $3,000,000, and we were in compliance with all of its covenants.

   Working Capital and Capital Expenditure Needs

     We believe our existing cash, cash equivalents, expected cash to be provided by our operating activities, and funds available through our revolving credit facility (as increased by the net proceeds from our public offering) will be sufficient to meet our currently planned working capital and capital expenditure needs over at least the next 12 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 expansion of our 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. As part of our growth strategy in the future, we may seek investments in or acquisitions of other businesses, services, or technologies, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Contractual Obligations

     We generally do not enter into binding purchase commitments. Our principal commitments consist of obligations under our revolving credit facility and leases for our headquarters and distribution facility, as well as our retail stores and miscellaneous office space. The following table describes our commitments to settle contractual obligations in cash as of September 30, 2006, unless otherwise noted:

Critical Accounting Policies and Estimates

     Our 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. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2005 Annual Report on Form 10-K, filed on March 30, 2006, in Note A of the Notes to the Consolidated Financial Statements and the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Recent Accounting Pronouncements

     In December 2004, the FASB issued SFAS No. 123R, which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statement of operations. The accounting provisions of SFAS No. 123R are effective for fiscal years beginning after June 15, 2005, and we have adopted SFAS No. 123R for our fiscal quarter beginning January 1, 2006. The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s condensed consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. The adoption of SFAS 123R had no effect on the results of operations for the nine months ended September 30, 2006 as there were no outstanding unvested options for the nine months ending September 30, 2006. In addition, there have been no options awarded in the first nine months of 2006. On October 26, 2006, the Board of Directors approved the grant of 155,529 options, subject to certain restrictions. The options granted have an exercise price equal to the closing price of the common stock as reported on NASDAQ on the date of grant, vest over five years, and expire ten years after grant date subject to earlier termination in the event of employment termination and for incentive stock options granted to 10% holders, which expire five years after the grant date. The future stock-based compensation expense will be reflected in the consolidated financial statements beginning in the fourth quarter of 2006.

     In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109”, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 will be effective for fiscal years beginning after December 15, 2006. The Company has not yet completed its evaluation of the impact of adoption on the Company’s financial position or results of operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     At September 30, 2006, there had not been a material change in any of the market risk information disclosed by us in our Annual Report on Form 10-K for the year ended December 31, 2005. More detailed information concerning market risk can be found in Item 7A under the sub-caption “Quantitative and Qualitative Disclosures about Market Risks” of the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 40-41 of our Annual Report on Form 10-K for the year ended December 31, 2005 .

     Our objective in managing our long-term exposure to interest rate and foreign currency rate changes is to limit the material impact of the changes on cash flows and earnings and to lower our overall borrowing costs. We have calculated the effect of a 10% change in interest rates over a month for both our debt obligations and our marketable securities investments and determined the effect to be immaterial. We do not foresee or expect any significant changes in the management of foreign currency or interest rate exposures or in the strategies we employ to manage such exposures in the near future.

Foreign Currency Risk

     Nearly all of our 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.

Interest Rate Sensitivity

     We had cash and cash equivalents totaling $0.1 million at September 30, 2006. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Some of the securities in which we invest, however, may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investments to fluctuate. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, debt securities 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 of our investment portfolio as a result of changes in interest rates. As of September 30, 2006, all of our investments were held in money market and other short-term investment accounts.

     Our 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. The advances under this revolving credit facility 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. We maintain a derivative financial instrument to hedge the risk of interest rate fluctuations on a portion of our outstanding bank debt. If interest rates were to increase by one percent, the additional interest expense as of June 30, 2006 would be approximately $50,000 annually prior to any potential benefit from our interest rate protection. At September 30, 2006 there was $6.6 million outstanding under our revolving credit facility.

Item 4. Controls and Procedures

     Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2006, to assure that information required to be disclosed by us in the reports we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2006, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

We maintain certain internal controls over financial reporting that are appropriate, 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 generally accepted accounting principles. No change in our internal control over financial reporting occurred during the fiscal quarter ended September 30, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

      Our growth may strain operations, which could adversely affect our business and financial results. Our business has grown and continues to grow through organic growth and acquisitions. Accordingly, sales, number of stores, number of countries in which we conduct business and number of associates have grown and will likely continue to grow. This growth places significant demands on management and operational systems. If we are not successful in continuing to support our operational and financial systems, expanding our management team and increasing and effectively managing our associate base, this growth is likely to result in operational inefficiencies and ineffective management of the business and associates, which may in turn adversely affect our business and financial performance.

      Our operating results may be impacted by changes in the economy. Our operating results are directly impacted by the health of and confidence in the North American economy. Current economic conditions may adversely affect our business and our results of operations.

      Our stock price may fluctuate based on market expectations. The public trading of our stock is based in large part on market expectations that our business will continue to grow and that we will achieve certain levels of net income. If the securities analysts that regularly follow our stock lower their ratings or lower their projections for future growth and financial performance, the market price of our stock is likely to drop significantly. In addition, if our quarterly financial performance does not meet the expectations of securities analysts, our stock price would likely decline. The decrease in the stock price may be disproportionate to the shortfall in our financial performance.

      Our quarterly operating results are subject to significant fluctuation. We experience seasonal fluctuation in our revenues and operating results. We typically realize a higher portion of our revenues and operating results during the fourth quarter. As a result of this seasonality, we believe that quarter to quarter comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. Our operating results have fluctuated from quarter to quarter in the past, and we expect that they will continue to do so in the future. Our earnings may not continue to grow at rates similar to the growth rates achieved in recent years and may fall short of either a prior fiscal period or investors’ expectations. Factors that could cause these quarterly fluctuations include the following: the extent to which sales in new stores result in the loss of sales in existing stores; accrual or pre-opening store expenses in one or more new store locations, resulting in higher operating expenses without a corresponding increase in revenues; the transaction costs and goodwill associated with acquisitions; the mix of products sold; pricing actions of competitors; the level of advertising and promotional expenses; and seasonality, primarily because the sales and profitability of our stores are typically slightly lower in the first and second quarters of the fiscal year than in other quarters. Most of our operating expenses, such as rent expense, advertising expense and employee salaries, do not vary directly with the amount of sales and are difficult to adjust in the short term. As a result, if sales in a particular quarter are below expectations for that quarter, we may not proportionately reduce operating expenses for that quarter, and therefore this sales shortfall would have a disproportionately negative effect on our net income for the quarter.

      If businesses we acquire do not perform as well as we expect or have liabilities that we are not aware of, we could suffer consequences that would substantially reduce our revenues, earnings and cash flows. Our business strategy includes growth of our retail store channel, both through the development and opening of new Dover-branded store sites and the acquisition and conversion of existing retail stores to the Dover brand. Our financial performance may be adversely affected as the result of such acquisitions by such factors as: (1) difficulty in assimilating the acquired operations and employees, (2) inability to successfully integrate the acquired inventory and operations into our business and maintain uniform standards, controls, policies, and procedures; (3) lower-than-expected loyalty of the customer base of the acquired business to Dover-branded stores and products; (4) post-acquisition variations in the product mix offered by the stores of the acquired business, resulting in lower revenues and gross margins; and (5) declines in revenues of stores of the acquired business from historical levels and those projected. Further, businesses we acquire may have unknown or contingent liabilities that are in excess of the amounts that we have estimated. Although we have obtained indemnification, we may discover liabilities greater than the contractual limits or the financial resources of the indemnifying party. In the event that we are responsible for liabilities substantially in excess of any amounts recovered through rights to indemnification, we could suffer severe consequences that would substantially reduce our revenues, earnings and cash flows.

      The future sale of shares of our common stock may negatively impact our stock price. If our shareholders sell substantial amounts of our common stock, the market price of our common stock could fall. A reduction in ownership by our controlling shareholders or any other large shareholders could cause the market price of our common stock to fall. Similarly, the market may disfavor the adoption of Rule 10b5-1 trading plans by one or more of the Company’s Officers or Directors, perceiving that such a plan represents a decline in management’s confidence about the Company’s prospects or that the parameters for and trading under a Rule 10b5-1 sales plan could cause downward pressure on the stock price. In addition, the average daily trading volume in our stock is relatively low. The lack of trading activity in our stock may lead to greater fluctuations in our stock price. Low trading volume may also make it difficult for shareholders to make transactions in a timely fashion.

Item 2. Use of Proceeds from Registered Securities

     The remaining proceeds from the initial public offering which were not utilized to pay down our subordinated debt and temporarily reduce our revolving loan balances totaled $2.8 million as of December 31, 2005. In the first nine months of 2006, our cash management function utilized the remaining cash available from the Company portion of the offering for normal seasonal working capital needs of the business. As of the end of the third quarter of 2006, the proceeds of our offering remain available through our improved ability to draw on our senior credit facility for other purposes, including new store growth.

Item 5. Other Information

     Our policy governing transactions in our securities by directors, officers and employees permits our officers, directors and certain other persons to enter into trading plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. Mr. Jonathan A.R. Grylls, our Chief Operating Officer and member of our Board of Directors, has entered into a trading plan (a “Plan”) covering periods after the date of this Quarterly Report in accordance with Rule 10b5-1 and the restrictions in our policy governing transactions in our securities. Generally, under these trading plans, the individual relinquishes control over the transactions once the trading plan is put into place. Accordingly, sales under these plans may occur at any time, including possibly before, simultaneously with, or immediately after significant events involving our company.

     We anticipate that, as permitted by Rule 10b5-1 and our policy governing transactions in our securities, some or all of our officers, directors and employees may establish trading plans in the future. We intend to disclose the names of executive officers and directors who establish a trading plan in compliance with Rule 10b5-1 and the requirements of our policy governing transactions in our securities in our future quarterly and annual reports on Form 10-Q and 10-K filed with the Securities and Exchange Commission. However, we undertake no obligation to update or revise the information provided herein, including for revision or termination of an established trading plan, other than in such quarterly and annual reports.

     As disclosed in Note C to the Financial Statements in Part 1, Item 1, on October 26, 2006 (following the date of this report), the Company awarded 155,529 options to purchase shares of the Company’s common stock to directors, officers, and key employees. Related future stock based compensation expense will be reflected in the consolidated financial statements beginning in the fourth quarter of 2006. This change will have the effect of decreasing our net income and earnings per share, which may negatively impact our stock price.

     The Company’s Board of Directors plans to increase the size of the Board to seven members, and the current independent directors plan, on or before November 16, 2006, to elect a seventh Director who, as a class II Director, meets the definition of independence as specified by NASDAQ and SEC rules and whom they have affirmatively determined has no relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In connection with such election, the Company plans to timely file a current report on Form 8-K with requisite information about such anticipated seventh Director.

     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 firm owned by a Company employee and minority stockholder to source construction services and retail fixtures. As confirmed by the Audit Committee, the Company negotiated this arrangement on commercially fair and reasonable terms on an arms-length basis with the development firm’s owner, who is not an officer or director of the Company. Total payments for the nine months ended September 30, 2006, consisting primarily of reimbursements for materials and outside labor, for the fit-up of five stores were $283,000. Reimbursements in the prior fiscal year were $91,000.

Number		Description
*†10 .1		1999 Stock Option Plan (the “1999 Plan”)
*†10 .2		Form of Stock Option Agreement under the 1999 Plan
*10 .3		2005 Equity Incentive Plan (the “2005 Plan”)
*10 .4		Form of Stock Option Agreement under the 2005 Plan
*10 .5		Form of Restricted Stock Award Agreement under the 2005 Plan
*10 .6		Lease, dated as of May 29, 1997, by and between Dover Massachusetts and CE Holman, LLP
*10 .7		Lease, dated as of October 12, 2001, by and between David F. Post and Dover Massachusetts
*10 .8		Lease, dated as of March 1, 2003, by and between Smith Brothers, Inc. and JDS Properties, LLC
*10 .9		Letter dated February 9, 2005 from the Company to JDS Properties, LLC regarding lease extension
*10 .10		Lease, dated as of June 22, 2002, by and between Hockessin Square, L.L.C. and Dover Massachusetts
*10 .11		Letter dated January 25, 2005 from the Company to Hockessin Square, L.L.C. regarding lease extension
*10 .12		Lease, dated as of November 24, 2003, by and between North Conway Holdings, Inc. and Dover Massachusetts
*10 .13		Stock Purchase Agreement, dated as of August 14, 1998, by and among the Company, James F. Powers, David J. Powers and Michele R. Powers
*10 .14		First Amendment to Stock Purchase Agreement, dated as of August 14, 1998, by and among the Company, James F. Powers, David J. Powers and Michele R. Powers
*10 .15		Amendment to Stock Purchase Agreement, dated as of September 17, 1998, by and among the Company, James F. Powers, David J. Powers and Michele R. Powers
*10 .16		Amended and Restated Loan Agreement, dated as of December 11, 2003, by and between Dover Massachusetts and Fleet National Bank
*10 .17		Amendment to Loan Agreement, dated as of December 11, 2003, by and between Dover Massachusetts and Fleet National Bank
*10 .18		Amended and Restated Security Agreement, dated as of December 11, 2003, by and between Dover Massachusetts and Fleet National Bank
*10 .19		Amended and Restated Pledge Agreement, dated as of December 11, 2003, by and between the Company and Fleet National Bank
*10 .20		Shareholder Pledge Agreement, dated as of September 17, 1998, by and among Stephen L. Day, Jonathan A.R. Grylls, David J. Powers, James F. Powers, Michele R. Powers and BankBoston, N.A.
*10 .21		Amended and Restated Revolving Credit Note, dated as of December 11, 2003, by Dover Massachusetts for the benefit of Fleet National Bank
*10 .22		Letter agreement, dated as of September 16, 2005, by and between Dover Massachusetts and Bank of America, N.A. (successor by merger to Fleet National Bank)
*10 .23		Security Agreement, dated as of December 11, 2003, by and between Smith Brothers, Inc. and Fleet National Bank
*10 .24		Guaranty, dated as of December 11, 2003, by Smith Brothers, Inc. to Fleet National Bank
*10 .25		Redemption Agreement, dated as of August 25, 2005, by and between the Company and Citizens Ventures, Inc.
*10 .26		Letter agreement, dated as of September 14, 2005, by and between the Company and Citizens Ventures, Inc., amending that certain Redemption Agreement, dated as of August 26, 2005, by and between the Company and Citizens Ventures, Inc.
*10 .27		License Agreement, dated as of February 10, 2003, by and between Weatherbeeta PTY LTD and the Company

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		DOVER SADDLERY, INC.
Dated: November 13, 2006		By:		/s/ Michael W. Bruns
				Michael W. Bruns, Chief Financial Officer
				(Principal Financial Officer and Duly Authorized Officer)

DOVER SADDLERY, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2006

EXHIBIT INDEX

*1.1		Form of Underwriting Agreement
*3.1		Amended and Restated Certificate of Incorporation of the Company
*3.2		Certificate of Amendment to Certificate of Incorporation of the Company
*3.3		Second Amended and Restated Certificate of Incorporation of the Company to be filed upon completion of this offering
*3.4		By-laws of the Company
*3.5		Amended and Restated By-laws of the Company to be effective upon completion of this offering
*4.1		Shareholders Agreement, dated as of September 17, 1998, by and among the Company, Stephen L. Day, Jonathan A.R. Grylls, David Post, Donald Motsenbocker, Thomas Gaines, David J. Powers, James F. Powers, and Michele R. Powers
*4.2		First Amendment to Shareholders Agreement, dated as of August 29, 2003, by and among the Company, Stephen L. Day, Jonathan A.R. Grylls, David Post, Thomas Gaines, David J. Powers, James F. Powers, and Michele R. Powers
*4.3		Second Amendment to Shareholders Agreement, dated as of August 25, 2005, by and among a majority in interest of the Purchasers (as defined therein) and a majority in interest of the Sellers (as defined therein)
*4.4		Instrument of accession, dated as of September 16, 2005, signed by Citizens Ventures, Inc. and accepted by the Company, to that certain Shareholders Agreement, dated as of September 17, 1998, by and among the Company and the Shareholders referenced therein, as amended
*4.5		Form of Common Stock Certificate
*4.6		Warrant to purchase common stock of the Company issued to Patriot Capital Funding, Inc.
*4.7		Amended and Restated 11.50% Senior Secured Subordinated Note, dated September 16, 2005, issued jointly by the Company, Dover Massachusetts and Smith Brothers, Inc. to Patriot Capital Funding, LLC I
*5.1		Opinion of Bingham McCutchen LLP
*5.2		Opinion of Preti Flaherty Beliveau Pachios & Haley LLP